As the Qatari economy begins to slow on the back of decreasing oil prices, liquidity in the country's banking system is feeling the squeeze. Ratings agencies have responded with downgrades, yet recent results are healthy as banks pursue new sources of growth.
Domestic banks in Qatar have long benefited from the country’s booming economy, which for much of the past decade has been among the fastest growing markets in the world. This growth has been driven by the development of Qatar’s vast hydrocarbon resources, as well as the expansion of the private sector and the huge sums of money being invested in infrastructure projects in the lead up to the country hosting the FIFA World Cup in 2022.
Yet, while Qatari banks continue to benefit from high levels of government support and construction financing, the landscape is slowly changing, bringing fresh changes but also opportunities for banks operating in the country.
A change of scene
The decline in global oil prices since June 2014 has translated into a reassessment of government spending in Qatar, resulting in a level of caution creeping into the economy. A reduction in governmental and public sector deposits has also led to lower liquidity in the banking sector. Even so, growth among Qatar’s lenders has continued.
"Despite economic headwinds, the banking sector in Qatar is healthy. Return on equity was 16.2% in 2015, with a very low level of non-performing loans [NPLs], at 1.6%," says a spokesman for Qatar National Bank (QNB). This compares favourably with 2014, when return on equity in the banking sector was 16.5% and the NPL ratio stood at 1.7%.
In the first quarter of 2016 the Qatari banking sector’s key performance indicators improved, albeit slower than in previous years. "The banking system in Qatar is stable and functional but overall balance sheet growth has slowed down a bit,” says Dr R Seetharaman, CEO of Doha Bank. “In the first three months of 2016 it was 1.9%. Credit facilities have grown by more than 3%. Government lending [bank lending to the government] has gone up 7.4%, while real estate has grown by 4.9%. Retail has taken a bit of a hit – it was -1.7%. Contracting is standing still [at -0.3%].”
These figures highlight a potential new landscape of reduced investment and lower liquidity in the system, though growth is expected to continue.
“Over the past five years, the banking sector recorded very strong momentum, averaging an asset growth of 12% on the back of robust corporate activity and consumer consumption. Qatar is one of the few countries in the region that managed to maintain its credit ratings due to its ambitious medium-term infrastructure investment programme and its measures to control current expenditures,” says Bassel Gamal, group CEO of Qatar Islamic Bank (QIB).
Funding flows
Over the years, Qatari banks have been in a strong position to grow their loan books, with large levels of finance needed for major infrastructure projects in time for the football World Cup in 2022. However, Qatari banks have seen liquidity decline, as lower oil prices have impacted the flow of deposits.
The local population in Qatar is small, and traditionally government and public sector deposits have accounted for more than 40% to 45% of all deposits. Recently these entities have been deleveraging and there has been a visible decline in their holdings in the system.
“Since the second half of 2014, until February 2016, government and public sector entities’ deposits declined by about 19%. As a consequence, deposit growth is very slow. So funding conditions are changing,” says Timucin Engin, a Gulf bank analyst at ratings agency Standard & Poor’s.
“I don’t think that funding will not be available, but the price is changing. The cost of funding for Qatari banks has been increasing visibly if you look at the overnight rates for the past few months,” he adds.
Doha Bank’s Mr Seetharaman says: "Banking sector liquidity has degenerated, there is no question. As the public sector has drawn down so have deposits, but bank lending has continued to grow. Public sector withdrawals have impacted [upon] the banking sector’s liquidity. The banking systems loan-to-deposit ratio is 120%. In December 2014 it was 105%. That says it all.”
He adds that system stress is visible in the liquidity framework but that the banks are finding funds from abroad. “The stability is there, and the ability to borrow is there. It depends how much you want to borrow, and at what costs you want to borrow,” says Mr Seetharaman.
Rating concerns
Banks in Qatar have been fully compliant with Basel III capital adequacy standards since April 2014, with a capital adequacy ratio of 15.6% at the end of 2015, and there is a push to maintain this strong ratio. In the past, bank dividend payments have been significant in Qatar, but the central bank is currently active in trying to limit dividend payments so that banks continue to maintain strong capital ratios.
On paper, Qatari banks have a very low NPL ratio – 1.6% at the end of 2015 – but upon closer inspection there is a significant amount of concentration in the allocation of loans, which increases future risk. “The top 20 lending names represent 25% to 30% of the total on average in the Gulf, and for Qatar. There is significant risk in the contracting business,” says Nadim Amatouri, a ratings analyst at Standard & Poor's in Dubai.
In May S&P said in a research note that it expected to see an increase in NPLs for the sector between 2016 and 2018, triggering an increase in credit losses. “We believe all these factors combined will result in some decline in the banking system's profitability,” it said, explaining the decision to downgrade its economic risk score for Qatar's banking system from '4' to '5'.
“We can expect to see more delayed payments to contractors, and more importantly to subcontractors. We do expected delayed payments in contracting business to penalise banks in Qatar,” says Mr Amatouri. “All core projects for the Qatar National Vision [2030 initiative] will go through, but accessory projects have been shelved. Overall we don’t expect a change in the breakdown of loans per sector.”
While ratings agencies have been reassured by the continued growth of the banks’ balance sheets, as well as by the strong commitment of the Qatari government to the domestic banking sector, some have recently downgraded, or suggested that they might downgrade, their ratings for several leading Qatari banks.
While rating agency Fitch equalised all of the banks' support rating floors and issuer default ratings at A+, on April 21, 2016 – except for QNB, which it rated more highly due to its status as Qatar’s flagship bank – on the belief that the banks have implicit state support and would be rescued if needed, others have been more cautious in their ratings.
On May 3, 2016, S&P lowered its long-term rating on Commercial Bank of Qatar (CBQ) to BBB+ from A- (while affirming its A-2 short-term rating), suggesting that the bank's asset quality will remain weaker than its Qatari peers' over the next two years. It also revised its outlooks for QIB and Doha Bank to 'negative' from 'stable', while maintaining its A+/A-1 long- and short-term counterparty credit ratings for QNB.
“We believe the lending books for most banks will come under pressure, increasing credit losses and weakening earnings generation,” the rating agency said at the time.
In early March 2016, credit ratings agency Moody’s took rating actions on 26 banks located in the Gulf Co-operation Council (GCC), with their long-term ratings and/or counterparty risk assessments placed on review for downgrade. The list included QNB and CBQ.
Defying the downgrades
Despite this growing caution, first-quarter results for Qatar's banking sector were solid. QNB, one of the largest lenders in the region by size of assets, posted a 7% rise quarter on quarter, with net profits hitting QR2.9bn ($797m), up from QR2.7bn for the equivalent quarter a year earlier. The bank’s total assets grew 9.7% year on year at the end of March, while loans and deposits grew 16% and 10%, respectively.
Another leading player, Doha Bank, saw a net profit of QR354m for the first quarter, with total assets growing 14.2% year on year to QR10.5bn and total equity up 19.6% over the same period. CBQ, the country’s third largest lender by assets, saw its net profits rise by 177% quarter on quarter, though down heavily year on year: in the first quarter, net profits of the bank were QR274m, down from QR462 in the first quarter of 2015, weighed down by rising net provisions for loans and advances, but up from QR93m in the final quarter of 2015.
Meanwhile, QIB reported a 23% increase in first quarter net profits. The bank made a net profit of QR492.4m in the first quarter of 2016, up from QR400.4m the previous year. Total lending rose 40% year on year, while deposits were up 26% in the same period. “We have been able to post solid growth rates and to recapture market share during the past three years by offering new products and services, creating efficiencies and synergies across the organisation while applying a rigorous and conservative risk management framework,” says QIB’s Mr Gamal.
“QIB now controls more than 43.5% of the Islamic banking market share in Qatar and 11.5% of the overall market as per the latest figures published by the Qatar central bank,” he adds.
Diversifying revenue streams
QIB and other Islamic banks have been aided in recent years by the decision of the Qatari central bank in 2011 to force conventional banks to close their Islamic banking windows by the end of that year.
However, similar to most Qatari banks, QIB is aware that it needs to diversify in order to keep its growth figures strong. “To keep on growing, we will need to further diversify our revenue streams by strengthening the relationship with our existing customers while attracting new ones, many of whom might not have banked with an Islamic financial institution previously,” says Mr Gamal.
Many Qatari banks are looking abroad in order to diversify. At the end of 2015, QNB bought Turkish lender Finansbank for $2.95bn, one of the largest overseas investments by a Qatari bank to date.
This was just the latest example of a Qatari bank expanding its operations overseas through strategic acquisitions. In 2013, QNB acquired a 97% stake in Egyptian lender NSGB, while in April 2015, Doha Bank finalised the acquisition of the Indian assets of HSBC Bank Oman. “India is the strongest developing partner of the Gulf states, so we see an opportunity,” says Doha Bank’s Mr Seetharaman.
Qatari Bank, similar to QIB, Doha Bank and QNB, already has a growing presence in markets such as the UK, elsewhere in the Middle East and further afield in countries such as Malaysia, and this is becoming the norm.
According to Fitch, QNB’s recent acquisition of Finansbank will weaken the bank's risk profile, but Turkey could provide an opportunity for diversifying growth in the longer term, “an opportunity that is not available in QNB's fairly small undiversified domestic economy”.
However, the growing involvement of Qatari banks abroad comes with plenty of opportunities, but also some risks. "[Qatari banks] don’t necessarily have underwriting experience outside of Qatar. As they continue to expand overseas their risk management practices will definitely be tested," says Mr Engin.
“It will be interesting to see how this plays out and we see certain challenges. Banks will have to beef up their risk management practices and platforms. It is one thing to underwrite a loan at home where you have a lot of familiarity, but it is a totally different business when you manage exposure overseas,” he adds.
Looking forward
As the Qatari banking sector’s growth moves away from a reliance on government spending and state-sponsored infrastructure projects, new alternatives will also need to be found domestically.
The Qatari government is determined to grow and developing the country’s private sector, especially small and medium-sized enterprises (SMEs) and domestic banks, will play a key role in this going forward. "Financial institutions play a critical role to nurture the private sector, which is still in a nascent state in Qatar, in line with the Qatar National Vision 2030 initiative," says the QNB spokesman. “They provide the necessary funding and liquidity for project execution.
"To support the further development of the private sector, QNB is actively nurturing this segment and acting as an incubator for SMEs. QNB has developed a dedicated value proposition and positions itself as a one-stop shop for this segment.” Many other banks are trying to do the same.
The Qatari banking sector remains highly competitive, and domestic banks will need to continue to adapt if they are to maintain their impressive growth achieved in recent years. That said, the sector as a whole looks set to continue its growth, and could go from strength to strength.
“The fundamentals of the banking system are very strong. The banking sector is growing very rapidly. The NPL ratio is very low, since [Qatari banks] are lending mostly to public sector entities, [though] the one issue is liquidity,” says Giyas Gökkent, senior economist for Africa and the Middle East at the Institute of International Finance.
Others agree that the sector remains buoyant overall. “QIB, along with all local banks operating in Qatar, have adequate profitability, capital and liquidity positions and continue to achieve positive growth despite the challenging economic environment,” says QIB’s Mr Gamal.
