Leaner strategies help Qatari banks remain healthy

Qatar's years of double-digit gross domestic product (GDP) growth may be over but the story behind the country's current, if slower, economic performance is no less impressive. While a self-imposed moratorium on gas developments in the giant North Field looks set to continue until at least 2015, the government has acted swiftly to stimulate the Gulf country's nascent non-hydrocarbon private sector to achieve sustainable growth.

In 2011, real GDP growth reached 13%, reflecting the trend over much of the previous decade, before falling to 6.2% in 2012. This downward shift signalled the end of major development programmes in the oil and gas sector, as well as the impact of the moratorium, hitting the country’s overall economic performance. Yet, this exercise in hydrocarbons self-discipline appears to have drastically improved Qatar’s longer term growth prospects. By 2015, the oil and gas sector is expected to constitute about 46% of total GDP, compared with about 60% at the start of the decade.

These changes point to the success of government policy in transitioning Qatar to a diversified economy. Yet, they also speak of an environment in which the country’s banks have had to adapt, to some degree, to this new business landscape. “Qatar’s economy has entered a transition phase,” says Charles Carson, CEO of Standard Chartered in Qatar. “But we expect accelerated growth to resume by 2015, as the infrastructure developments relating to the 2022 FIFA World Cup pick-up.”

Over the next five years, the government has allocated about $182bn towards infrastructure spending. This sum will help to finance the construction of critical infrastructure, including upgrading the capacity for road, rail, air and maritime transport. Additionally, new housing, sewage and water infrastructure, as well as the associated construction of stadia for the 2022 World Cup, will benefit from this spending.

Piece of the pie

Qatar’s banks have not failed to capitalise on this surge in infrastructure development. Non-hydrocarbon growth rose to 11.3% in 2013, creating a host of new opportunities for the country’s lenders. Figures from the central bank indicate that the banking system’s total assets grew by 11.4% in 2013, while deposit growth reached 19.7%. Moreover, the vitality of the system was underscored by the low ratio of non-performing loans (NPL), at 1.7%, set against an average return on equity of 16% for the year.

Despite the strength of these numbers, increasing competition in the domestic market remains a challenge, even for the largest players. Of Qatar’s 18 licensed banks operating outside of the Qatar Financial Centre, seven of these are either subsidiaries or branches of foreign lenders, while the top five largest local lenders dominate with about 84% of the system's total assets. As such, carving out a strategy to capitalise on growth sectors of the economy has seen varying responses from the local operators.

“The Qatari economy and its banking system, as well as the Gulf Co-operation Council [GCC] region economies, are anticipated to grow strongly over the medium term. Qatar’s trade volumes are also increasing every year,” says Abdulla Saleh Al Raisi, CEO of the Commercial Bank of Qatar (CBQ). “As the second largest bank in Qatar, with a regional presence in north Africa and the Middle East, we are very well positioned to benefit from this growth. We want to build a profitable market share in private and personal banking, where we believe that we have a very competitive proposition, and improve the profitability of our wholesale banking franchise, including growing our share of low-risk and profitable government sector business.”

In this space, predominantly characterised by a competitive retail market on the one hand, and large project finance contracts on the other, finding a niche can be challenging. Smaller market players have adapted by targeting local contractors in the corporate banking sphere.

“Project infrastructure contract sizes are increasing all the time and at times we can’t match the scale of the financing required. Our preference is to work with local contractors as we understand the domestic market very well. In this respect, the bank has identified medium-sized enterprises as a key growth area. It’s something we’re looking to develop over the longer term, as we think this sector of the economy is relatively underbanked,” says Salah Murad, chief executive of Ahli Bank.

Risky business

While the banks’ growth strategies, and the sector fundamentals that underpin them, remain robust, some hazards do persist. As much of the country’s recent economic growth has stemmed from the construction and real estate sectors, the associated elevation of the banks’ risk exposure to these sectors has grown. According to a Standard & Poor’s research note published May 7, 2014, Qatari banks' exposure to real estate and construction stood at 20% and 6% of total system loans by year-end 2013, respectively. Typical project delays associated with infrastructure projects, including cash-flow lag, have also proved disruptive to profitability.

“This sector has been an important driver of the problematic exposures for certain banks and a deterioration of the overall conditions in this sector could generate higher credit losses for some banks in the domestic market,” says Timucin Engin, an analyst with Standard & Poor’s Dubai office.

Yet, this risk is partly offset by the fact that the banking sector as a whole remains very well capitalised, with a high level of provisioning, particularly among the largest operators in the market. The country’s largest lender, Qatar National Bank (QNB), which represents about 45% of total banking sector assets, has a capital adequacy ratio of 16.3%, against a sector average of 16%. Moreover, NPL ratios remain at less than 2% in the sector.    

“CBQ has one of the biggest shares of private sector lending and our balance sheet is to an extent a mirror of the private sector of Qatar. In common with other banks that operate in the private sector, we have seen some improvement in the operating environment in the past couple of quarters. Our overall asset quality remains good, despite the higher provisions taken in 2013 on a few large domestic exposures,” says Mr Al Raisi. “Looking at regional and global comparatives, CBQ’s NPL ratios are not high and have improved in the first quarter of this year, and with expected growth in our loan book, these levels should moderate further.”

Questionable intentions

An additional uncertainty relates to the oversight of the banking sector. The long-term implications of changes to the financial regulatory environment, including streamlining the various regulatory authorities under the auspices of the central bank, remain unclear. While nominally imposed to improve the country’s regulatory landscape, by increasing transparency and efficiency, doubts have been raised as to whether such centralisation of powers will ultimately benefit the broader financial services industry.

This change followed a unilateral decree issued by the central bank in 2011, in which conventional banks were forced to close their Islamic banking windows by the end of the year, leading critics to question the haste of the decision, as well as the intentions of the central bank.

In June 2013, the central bank introduced new legislation covering the investment options of local banks. Under the new laws, which curb banks’ investment options, securities portfolios are limited to 25% of a bank’s reserves. However, government and national bank debt remains the exception to this rule, meaning that the banks are indirectly encouraged to transfer excess liquidity into government holdings. In addition, limitations are imposed on securities held outside of the country, with a cap set at 15%. Furthermore, restrictions covering the allocation of a bank’s capital in unlisted securities both inside and outside of the country, set at 10% and 5% respectively, were introduced. This move by the QCB was widely regarded as a decisive move to strengthen the domestic financial framework. 

Moreover, the prospect of ever larger infrastructure financing requirements, that dwarf the capacity of the country’s largest lenders, is starting to change lending strategies in the market. Increasingly, Qatar’s banks are looking to syndicated loan activity to solve this problem.

“Syndicated loan markets are seeing a revival in the region, and will be the primary source of cheaper wholesale funding for larger private sector companies,” says Mr Al Raisi. “Most recently, we closed a $1bn dual-tranche, syndicated-term loan with a subscription of $1.28bn, compared with a launch size of just $600m. CBQ was also the first Qatari bank to issue senior bonds under a euro medium-term notes programme, as well as the first to issue and list global depository receipts on the London Stock Exchange."

Stream of sukuk 

In this environment, the country’s Islamic lenders have also prospered, despite facing commensurate challenges. A large lead over conventional rivals in terms of assets saw total asset growth of 35% in 2011 and 20% in 2012, fall sharply in 2013 to just 12.2%. Broadly, this trend was in line with conventional counterparts, though Islamic banking growth is expected to remain higher on average over the next few years, according to Mr Engin. Qatar’s Islamic finance sector has also been noted for its innovative approach to the development of sharia-compliant products and services.

“We are extremely proud of QInvest’s performance in 2013. We were able to reduce costs by about 30% and increase revenue by 40%, while also reducing balance-sheet risk,” says Tamim Hamad Al-Kawari, chief executive officer of QInvest, one of Qatar’s leading financial services firms.

QInvest recently launched its sharia-compliant 'shiraa funds', in partnership with Qatar Islamic Bank, which target equity and sukuk options across three distinct risk categories. The company is also responsible for the development of the QInvest Managed Account Platform, which is the world’s first fully sharia-compliant account platform.

In line with this growth, sukuk issuance emerging from Qatar is expected to accelerate over the medium term. In January 2014, the Qatar Central Bank issued $6.6bn of conventional and Islamic bonds, of which roughly half were sukuk. "Infrastructure growth by itself is unlikely to spur a greater volume of sukuk issuance from Qatar as the government surplus will cover a large part of this expenditure. What will drive it forward is the country’s natural economic growth in general, particularly at the government related entity and corporate level,” says Hani Ibrahim, head of debt capital markets at QInvest.

Moreover, Qatar’s Islamic institutions have also been highly active on the global stage. Qatar Islamic Bank, the country’s largest sharia-compliant lender, announced in March 2014 it had entered into exclusive discussions to acquire a stake in Turkey’s Bank Asya.

Other institutions are also looking to Turkey for growth. “In terms of investment banking, Turkey has been a particular highlight for QInvest,” says Mr Al-Kawari. “We have grown substantially with respect to our business with Turkish corporates as well as our joint lead manager and bookrunner roles on the $1.25bn sukuk issuance for Turkey. We’re looking for more opportunities for QInvest there, and feel this will be an important market for our long-term growth.”

Extended reach

The increasing globalism of Qatari banks has been a defining feature of the country’s financial landscape over the past 12 months, made notable by a number of major acquisitions by the leading lenders. This is partly the result of the increasingly competitive domestic market and the natural evolution of larger players seeking higher growth opportunities abroad. Yet it also reflects the growing strength and confidence of a banking sector that is both well capitalised and flushed with liquidity. The country’s two largest lenders by total assets, QNB and the CBQ, have been especially active in this respect.

“CBQ’s international expansion and acquisition strategy to date has been very successful," says Mr Al Raisi. "We acquired a 34.9% stake in the National Bank of Oman in 2005, and a 40% stake in United Arab Bank in 2007. Both these banks have successfully grown their business franchises and profitability in recent years. The acquisition of a 74.24% stake in Alternatifbank [in Turkey] is more recent. In total, these institutions contributed just less than 27% of CBQ’s consolidated net profit for the first quarter of 2014. The Alternatifbank acquisition added total assets of QR18.4bn [$5.05bn] and total lending of QR12.1bn to CBQ’s balance sheet in the first quarter of 2014.” 

Meanwhile, QNB acquired a 97% stake in Egyptian lender NSGB in 2013, coupled with other strategic acquisitions, pushing its global presence to 26 countries.

Promising future

Qatar’s broader economic outlook appears to be strong. The banking sector continues to play a significant role in its development, and its continued buoyancy will be a crucial component of the government’s plans to push the country beyond hydrocarbons. Yet, as Qatar advances its national vision for 2030, it must also capitalise on its position as a stable and somewhat neutral player on the global stage. Despite recent political difficulties encountered with its GCC counterparts, Qatar’s open stance to global trade and investment lends itself well to the rapidly shifting global commercial and political landscape. 

“In terms of the macroeconomic outlook, I don’t see a lot of downside risks over the long term. If anything, I see Qatar’s position strengthening in light of Russia’s recent actions in Ukraine, and Europe’s renewed effort to secure a more reliable supplier of gas,” says Mr Carlson at Standard Chartered.

For Qatar, the long-term opportunities are abundant. The challenge will lie in maintaining steady growth; by avoiding the risks of overheating and upholding the country’s investor-friendly regulatory structures.