Covid-19 fallout unlikely to rock Qatari banking system as government splashes out on large infrastructure projects and demand for Islamic finance rises.


After being largely unaffected by the three-years-plus blockade imposed on it by some of its larger neighbours, Qatar is now dealing with the economic and healthcare impacts of the global coronavirus pandemic.

Banks in the Gulf state are facing the same challenges as others around the world, with a potential rise in non-performing loans (NPLs), a need to help finance the local economy – even if it affects banks’ bottom lines – and pressure from governments to do more, in terms of both lending and in offering grace period for loans.

Even so, while the pandemic is expected to put pressure on Qatari banks’ asset quality, overall the sector is in a strong position to prosper, despite concerns over the vulnerability of some sectors, such as real estate.

Supporting growth

“We expect growth in Qatar to be sustained across all banking segments as major infrastructure projects continue amid preparations for the 2022 FIFA World Cup,” says Bassel Gamal, group CEO of Qatar Islamic Bank (QIB). QIB is the second largest bank in Qatar and the country’s largest Islamic lender, representing roughly 11% of the total banking sector and 40% of the Islamic banking sector. It saw net profits increase by 10.9% in 2019, with total assets up 6.7% to QR163.5bn ($44.9bn). 

Mr Gamal adds that the impact of lower oil prices and Covid-19 would normally have a more profound negative implication on the economy, but commitments related to the 2022 World Cup and associated projects are an absolute priority and, as such, he expects to see a more benign impact on government spending in Qatar.

“This is important since in the current environment government spending is fuelling the wider economic activity. We also expect the government to dip into its vast wealth fund to mitigate part of the lower income driven by the lower oil prices and the implications on gas and liquefied natural gas revenues,” he says.

Even so, in early April 2020, rating agency Moody’s Investors Service changed its outlook from stable to negative for Qatar’s banking system – alongside those of its Gulf neighbours Saudi Arabia, the United Arab Emirates, Kuwait and Bahrain – due to the collapse in oil prices and the coronavirus pandemic. However, it stressed that Qatari banks are well capitalised and profitable, and are “highly likely to benefit from government support if required”.

It is likely this will be the case. After the UAE, Saudi Arabia, Egypt and Bahrain established a political and economic blockade on Qatar in June 2017, resulting in $30bn of non-resident deposits exiting the country’s banking system, Qatari state agencies pumped in around $40bn, more than replacing the money that had left. There is confidence that banks would receive similar levels of support through this pandemic, if needed. Already, authorities have announced that the central bank will provide liquidity support to the banking system.

Yet disruption to civilian life and business activities are likely to lead to rising problem loans and weaker profitability, Moody’s said in April, with liquidity pressures increasing due to an increasing reliance on foreign funding. Moody’s also predicted economic growth to be flat for Qatar in 2020.

Strength and weakness

Qatar’s commercial banks experienced double-digit growth in domestic assets in 2019, which were up 12% year-on-year to reach QR1320bn at end-2019, according to the Qatar Central Bank. Domestic assets constituted 85% of total assets held by commercial banks. Meanwhile, total credit grew by 11% to QR1040bn, with private sector credit rising more than 20% year-on-year to QR635.2bn, representing 66% of total domestic credit at the end of December.

Qatar’s listed banks saw a 5.5% profit increase in 2019, according to KPMG. Omar Mahmood, head of financial services at KPMG in the Middle East and south Asia, describes it as a testament to their efforts to “grow their balance sheets, with a clear focus on high quality assets and lower risk, yet profitable, business”.

Not everyone agrees. In a November 2019 report, Capital Economics highlighted what it called the “build-up of vulnerabilities in the banking sector” caused by the strong growth in credit. At that point, the credit-to-gross domestic product (GDP) ratio had risen by more than 10 percentage points since the start of the year, to just under 90% of GDP. By year-end it would have risen to more than 95%.

The report said it is not just the growth in credit but where it has been directed in recent years that is a cause for concern – in particular, areas such real estate and tourism – as well as the fact that banks have relied on wholesale borrowing in order to finance the credit boom. “The main concern is that banks are lending to areas of the economy that are already struggling, raising the risk that there is a significant jump in NPLs further down the line,” says Jason Tuvey, senior emerging markets economist at Capital Economics.

Others have highlighted banks’ high exposure to the country’s real estate sector, which has struggled in recent years.

After the government announced its QR75bn stimulus package to the private sector in March, rating agency Fitch pointed out this was equivalent to less than 10% of total private sector lending and might not be sufficient to protect bank asset quality, “given that exposure to directly affected sectors including general services, trade, real estate and contracting represents around two-thirds of total sector lending”.

“Real estate and contracting account for around 24% of domestic lending,” it said, adding that it believes banks’ real exposure is much higher given their holdings of real estate collateral and lending to high-net-worth individuals and investment companies that indirectly finance these sectors. Qatar Central Bank’s real estate price index has fallen 27% from its peak in November 2015.

Even so, Fitch announced that it was maintaining all Qatari banks’ long-term issuer default ratings at stable, given the “extremely high probability of support from the Qatari authorities”.

NPLs could rise

Few believe that Qatar’s banks are in any real danger from the current pandemic, though they are likely to see reduced opportunities and profits, and a rise in NPLs, which represented just 1.55% of gross loans at the end of 2019.

In early May, S&P Global Ratings predicted that rated banks in the six-nation Gulf Co-operation Council, which includes Qatar, could absorb up to $36bn in additional credit losses before starting to deplete their capital base, 2.7 times the average normalised losses for the sector in the region. It based this partly on the fact that most rated Gulf banks have relatively strong profitability and a conservative approach to calculating and setting aside loan-loss provisions.

That being said, foreign liabilities account for around 35% of total liabilities in Qatar’s banking sector, not far off their highs in 2016-17, according to Capital Economics. “The Qatar banking sector’s large foreign liabilities leave it vulnerable to a tightening of external financing conditions, which might result in some banks struggling to roll over their debts,” says Mr Tuvey. “A wave of bank defaults is very unlikely but, at the very least, banks might be forced to shrink their balance sheets and this will result in a credit crunch.”

In the first quarter of 2020, total assets in the banking industry grew by 4.4%. Credit expansion was around 5% and government borrowing roughly 7%. Real estate saw 0.5% growth, while consumption was flat. However, that was before the coronavirus pandemic began to significantly affect the Gulf region.

New order

Banks in Qatar are now being forced to realign their focus and reassess their near-term targets in the wake of the pandemic.

“The overall dynamics have changed. It’s a new order and we have to redefine the business values,” says Dr R Seetharaman, CEO of Doha Bank, one of Qatar’s largest lenders. “I think if you don’t deleverage, if you're not realigning your business model, de-risking your bank in terms of lending or investments, you will not be in a position to sustain your economics. So that’s what we’ve done.”

In order to help support the economy, banks in Qatar have also been encouraged to extend grace periods for private sector loans to six months, while small and medium-sized businesses and the tourism and logistics sectors have been exempt from custom duties for the same period of time. This is likely to negatively affect bank profits in 2020.

Other banks are also being cautious. “Apart from our business continuity planning measures, our priorities currently are to take a prudent approach to our business given the expected slowdown in economic activity and the uncertainty caused by Covid-19,” says Abdulla Mubarak Al-Khalifa, group CEO of Qatar National Bank (QNB). The bank, the largest in the Middle East by assets, recorded a net profit of QR14.4bn in 2019, up 4% year-on-year, with total assets up 10%, among the best results in the group’s history. QNB’s cost-to-income ratio was 25.9%, one of the best ratios among large financial institutions in the region.

On May 5, QNB sold $1bn in five-year bonds, as part of its ongoing strategy to ensure diversification of funding. The bond issuance was the first non-sovereign public issuance from the Gulf region since economies around the world began to shut down in February and March. The bank has also strengthened its internal processes “with regards to lending to new applications and facilities, new customers as well as the extension or refinancing for existing customers,” Mr Al-Khalifa says.

Islamic finance demand

Demand for sharia-compliant banking continues to grow strongly in Qatar. The country has four Islamic banks and has seen steady growth in its Islamic finance sector; as of end-2019, Islamic banking represented 27% of total assets in the Qatari banking system and 29% of deposits, according to QIB.

In April 2019, Barwa Bank completed its merger with International Bank of Qatar to create a combined sharia-compliant entity with more than QR80bn in assets. Barwa is now the sixth largest bank in Qatar, with a market share of roughly 6%. “I have always believed that competition is beneficial not only for the end-consumers but for the industry as a whole,” says QIB’s Mr Gamal. “It leads to innovation and lower costs, and filters the market in a way that allows forward-looking players to succeed in the long run.”

Efforts are also under way in Qatar to standardise and centralise regulations for the Islamic finance sector, to bring them in line with global best practice. Part of this would involve the establishment of a centralised sharia supervisory body and the creation of sharia-compliant standards to govern Islamic banking products and transactions.

Others want the country to go further. ”A key step to enhance the growth prospects of Qatar’s Islamic banking sector would be to make it a strategic government priority, supported by dedicated initiatives and incentives exclusively targeting Islamic banks,” Qatar Financial Centre said in a December 2019 report produced in partnership with Refinitiv. The report added that Qatar’s Islamic finance industry has grown at a compound annual growth rate of 8% since 2015, to hit $129bn in the first half of 2019.

Fintech drive

At the same time, Qatar Central Bank is gearing up to announce a fintech strategy, with the aim of contributing towards the creation of a modern regulatory environment that supports innovation and market stability. “The fintech strategy is very important. We need digital capabilities to become an essential element in banking processes, which calls for the development and direction of banking services into the future,” says Doha Bank’s Mr Seetharaman.

In a speech in December, central bank governor Sheikh Abdulla Bin Saoud Al-Thani said that preparations are under way to launch digital banks in Qatar, which would provide banking services through mobile applications, among other things. In September, Qatar also passed new regulations to combat money laundering and terrorism financing, bringing Qatar in line with the latest recommendations from the Financial Action Task Force.

The Qatari banking sector is likely to face far greater challenges in 2020 than it has in past years, but given its banks’ strong liquidity and the implicit support from the state, there is little risk beyond a likely drop in profitability and a rise in NPLs in the short term.

“Profits will get marginalised in terms of overall outcome, and we have to accept the change and remodel our revenues and costs,” says Mr Seetharaman at Doha Bank.


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