The banks of Qatar, well supported by financial measures taken by the government, seem set to run in tandem with the dynamic local economy, producing continued strong growth and new opportunities. Given that Qatar's gross domestic product per capita is expected to reach $63,387 by the end of 2009, making it one of the wealthiest nations in the world, and that the country's construction boom has not been derailed by the global financial crisis, banks are generally bullish about their prospects. But just as some of the large international banks are pulling back due to problems in their home markets, a number of well-capitalised local banks are being established.
How the huge financing needs surrounding Qatar's huge hydrocarbon projects and an estimated $100bn in construction projects in the pipeline will be met is of keen interest. Given that big global banks, such as Royal Bank of Scotland and Citi, are withdrawing from the market and domestic balance sheets are too small to support the very large projects, there is a definite squeeze on funding. But that does not mean that there are not considerable opportunities available at a variety of levels in a market where 40% of the budget is being ploughed into infrastructure. Two new Islamic investment banks, QInvest and Qatar First Investment Bank, were set up recently with paid-up capital of $500m and $430m, respectively, and they are confident there are big opportunities in the market.
Growing profits
The banking sector, which comprises 17 banks, including seven foreign banks, had a profitable year in 2008 with aggregate profits of Qatari banks up 23% to QR10bn ($2.7bn), the highest profit growth in the region. The three largest banks - Qatar National Bank (QNB), Commercial Bank of Qatar (CBQ) and Doha Bank - also made progress in expanding their Islamic windows. Islamic banking, at both a retail and wholesale level, is a high-growth sector, and the fourth largest bank, Qatar Islamic Bank (QIB), announced plans in April for a $1bn fund to tap regional appetite for Islamic products.
Conservative provisioning
Despite the global credit crisis and significant Q4 losses in 2008 of QR6bn, due to more conservative provisioning, 2008 was a good year and Qatari banks are expected to maintain profitability in 2009. This has been assured by the range of measures taken by the government to shore up banks' liquidity and provide comfort; these include buying stakes in listed banks through a capital increase and purchasing the banks' local equity investment portfolios.
The sector, however, continues to be dominated by QNB, which accounts for 44% of domestic bank assets and in 2008 provided a staggering 45.7% increase in net profits to reach QR3.65bn, four times the level of profits in 2004 and the third most profitable bank in the Gulf region. QNB, which has a large international network covering 23 countries as well as a 15.2% market share of domestic Islamic bank assets, is one the highest rated banks in the region. It also had a strong capital adequacy ratio of 13.9% at year-end 2008 and a low non-performing loans ratio of 0.7%.
The year ahead
For 2009, Ali Shareef Al-Emadi, Group CEO of QNB, is cautiously positive: "We still think we are not out of the woods. It will not be the end of 2009 until we have a clearer view. It is premature to say we are past the worst." QNB's focus this year will be on domestic operations with no major international expansion in sight.
Mr Al-Emadi believes that QNB's Islamic franchise is a fantastic story, with profits up 21% in Q1;QNB's overall profits rose by a solid 10.2% in Q1 2009 to $278m. Last year, QNB acquired 24% of the United Arab Emirates-based Commercial International bank and 50% of Tunisian-Qatari Bank as well as expanding its ATM network significantly to 150, but the key development was the opening of QNB's investment banking arm, QNB Capital, in November 2008.
Amid the financial turbulence of recent months, QNB Capital, along with HSBC, was able to pull off an extraordinary deal, the QR3.3bn Vodafone initial public offering (IPO) at the end of April. "Getting this IPO away is a huge success," says Ray Maurer, managing director of QNB Capital. Grahame Maher, CEO of Vodafone Qatar, echoes this sentiment: "The result is amazing. In any other country in the world this would not be possible. Qatar has demonstrated again that it is the leading global economy with this very strong and successful result." This IPO was the largest in the world this year and a positive sign for Qatar's financial development.
CBQ, the largest private sector bank which has a 17.7% market share of assets, also recorded strong results, with record net profits up 22.4% in 2008 to QR1.7bn, and the trend continued in Q1 2009 with net profits up by a staggering 40% QR610m. CBQ benefited from the unsolicited 5% capital injection from the Qatar Investment Authority in January and the sale of its entire equity investment portfolio in March for QR938m. CBQ's capital adequacy ratio was 15.5% at the end of March, leading executive general manager Nicholas Coleman to state that the bank is off to a good start in 2009, with cautious optimism about the future.
Healthy performance
Doha Bank, which has 11.3% market share of assets, also delivered a healthy performance in 2008 and in Q1 2009, with annual profits up by 2.2% to QR947m and quarterly profits up by 20% to QR330m. Doha Bank chief executive, R Seetharaman, is particularly impressed by the growth of Doha Islamic, the bank's Islamic arm, which is growing by 30% year on year and accounts for 15% of the group. Although aware of the local banks' limited balance sheets, Doha Bank recorded a strong return on equity in 2008 of 25.8% and healthy capital adequacy of 13.5%.
Qatar Islamic Bank, which has a 9.7% market share, performed well in 2008, with a 30.8% increase in profits to QR1.64bn but in Q1 this year it suffered a 23% decline as profits fell to QR350m. Nevertheless, Crédit Agricole Cheuvreux, a European equity broker, named QIB as a top investment choice and expects 28% profit growth this year. QIB may issue short-term sukuks (Islamic bonds) from September onwards to meet short-term liquidity needs.
Good opportunities
Meanwhile, two new Islamic investment banks, QInvest and Qatar First Investment Bank (QFIB), both perceive good opportunities for their well-capitalised institutions that do not have any legacy problems. QInvest's chief executive, Shahzad Shahbaz, recognises the potential to build a world-class platform and create a regional champion stretching across the Middle East, Africa and south Asia. Using a traditional merchant banking model, he considers his two key businesses to be investment and advisory with the ability and capital to co-invest and provide brokerage services. Like QInvest, Mike de Graffenried, the chief executive of QFIB, plans to use his fresh capital to develop the deals that he believes are there in abundance in this market. QFIB, launched in March at Doha's Museum of Islamic Art, considers itself to be the only fully independent local investment bank.
With some global banks in retreat and the economy undiminished by the global crisis, the local Qatari banks are well positioned to take full advantage of the ample opportunities available.
RETHINKING THE SINGLE REGULATOR
In 2007, the Qatar government announced its intention to create a single, unified financial regulator for the country. By integrating the regulatory and supervisory functions of the Qatar Central Bank (QCB), the Qatar Financial Markets Authority (QFMA) and the Qatar Financial Centre Regulatory Authority (QFCRA) the government anticipated significant benefits from the move.
Qatar's minister of finance, Yousef Hussain Kamal, says that a single regulator will bring "greater transparency and predictability, a simplified institutional landscape, greater efficiency through the pooling of scarce regulatory staff, and the ability to take a comprehensive view of financial institutions".
But the global financial crisis and its impact on regulatory models, such as that in the UK financial services industry, has given the Qatar authorities serious pause for thought. During the past two years, the new Qatar regulatory body was being modelled on the UK's Financial Services Authority (FSA) of which the chairman of the QFCRA, Philip Thorpe, was once a managing director.
In considering the consequences of the crisis and in looking at the UK's current tripartite debate, Mr Thorpe explains: "It would be negligent of us to follow the structure of the UK's FSA without examining the impact of the crisis on the UK model and its tripartite arrangement: it now appears there are things found wanting. We want to learn from this and incorporate it in our new model".
Although Mr Thorpe does not rule out the single regulator approach and is adamant that there is no change in the government's commitment to consolidated regulation and to international standards, he is keen to pursue the demands for "smarter regulations and smarter laws" and find the model that works best.
So what does this all mean for regulation and financial services in Qatar? The pre-crisis strategy of developing a single regulator, a level playing field, has been put on hold until the real needs of the country are better assessed. Does the central bank need more power? Who will regulate domestic insurance? How will the QFC relate to the central bank in a transparent way?
Although the QFC had seemed to be playing the dominant role in the new regulatory structure, the global crisis has engendered new thinking that could cause regulatory relationships to be reversed or changed. In a new global financial environment the role of regulation will be key, Qatar is giving itself more time to decide its regulatory strategy.
Net profits of Qatar's top four banks (QRm)
