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Middle EastJuly 3 2007

Good omens of upheaval

Qatar’s financial sector may be in for a shake-up as the country begins to fulfil the potential offered by huge oil revenues, writes Stephen Timewell.
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With gross domestic product (GDP) forecast to have a compound annual growth rate of more than 11% from 2006 to 2010, and current account surpluses of about 25% of GDP, it would be surprising if banks were not doing well in Qatar; 2006 proved to be another bumper year for banks. And, unlike banks in other Gulf states, such as Saudi Arabia and the United Arab Emirates, whose first quarter 2007 results were hit hard by the impact of last year’s stock market collapse, Qatar’s banks have continued to grow strongly this year. However, although the opportunities are abundant, there is little complacency: the larger banks are looking at overseas expansion and expanding Islamic operations, and the financial sector overall may be in for a big shake-up.

The creation of the Qatar Financial Centre (QFC) provides a world-class international financial services platform that has already attracted some key global players (see page 96). But the success of the QFC raises the issue that Qatar has quickly moved to a situation in which it has two financial regulatory structures: the traditional structure linked to the Central Bank of Qatar, and the relatively new internationally focused QFC. Can the two regulatory regimes continue or will they be consolidated into a single regulatory unit that will provide a suitable structure for Qatar’s growing financial ambitions?

World-class aims

Qatar’s strategy has been built around creating world-class structures, as seen in the country’s ambitious education plans as well as the initial QFC goals. The QFC, which is designed to provide the highest international standards, is viewed as the likely candidate to take over the sole regulatory role. However, taking away the regulatory responsibility from the central bank, as was done with the Bank of England in the 1990s, needs to be carefully considered.

Finance minister Yousuf Hussein Kamal, who is also chairman of Qatar National Bank (QNB), would not be drawn directly on the regulatory consolidation issue but says that discussions are taking place on the issue and that more will be made known by the end of the year. Bankers suggest that the central bank has no particular objection to giving up its regulatory role and the expanding QFC appears well placed to take on the single regulator role.

If the QFC takes on the role, it would give Qatar some clear advantages. Based on a separate, internationally recognised legal infrastructure, the QFC allows institutions to operate domestically and regionally, and provides some benefits over operating from the Dubai International Financial Centre (DIFC), for example, or from a Saudi base. As the Gulf market becomes increasingly competitive, the legal infrastructure surrounding each particular jurisdiction will become increasingly important. Qatar may not have all the answers but its possible single legal infrastructure could be attractive to many.

International banks are interested in not only the $1000bn in projects, but also the private banking, asset management and investment banking opportunities. According to the QFC and of interest to private banking, the total number of high net worth individuals in the Middle East increased by 9.8% in 2005, higher than in most regions of the world. In asset management, the average assets under management in the Gulf Co-operation Council (GCC) countries increased at an annual rate of 19%, from $20bn in 2001 to $57bn in 2006. And in investment banking, the total number of deals in the GCC doubled from 101 in 2004 to 220 in 2006.

On the domestic scene

The domestic banks in Qatar are dominated by Qatar National Bank (QNB), which accounts for more than 50% of the entire market. Like other banks, QNB achieved exceptional asset growth in 2006 across all sectors, increasing by 43.2% to Qr71.6bn ($19.7bn). It also managed to boost its pre-tax profits by 30.4% to QR2bn, providing an acceptable 32.8% return on equity.

As part of its regional expansion strategy, QNB has opened representative offices this year in Libya and Singapore, and plans to open branches later this year in Kuwait, Oman and Yemen (it will be the first GCC bank to open in Yemen). At home, it is pushing hard on its Islamic banking business and plans to continue to expand in this area. It has 37 branches across the country, seven of which are Islamic branches that have been established in the past three years. The bank also increased its provision of automated teller machines (ATMs) from 79 to 123 last year.

Mr Kamal says that the key objectives of the bank’s overseas expansion this year include an increase in profitability of 15% and increased reliance on fee-based revenues. In the first quarter, QNB produced pre-tax profits of $179.3m, up 6.7%, making it the sixth largest profit-taker among the GCC banks.

Assets of the Commercial Bank of Qatar, the country’s second largest bank, rose by 36.9% in 2006 to Qr30.4bn and profits increased by 25.9% to Qr891m. Commercial started this year well with first-quarter profits up 17% to $73.2m.

Doha Bank, like QNB, is expanding aggressively overseas and in Islamic banking, and last year increased its assets by 42.5% to Qr21.7bn. Chief executive A Seetharaman is optimistic about the new representative office in Japan and believes the bank has great opportunities in India, China and Singapore. Keen to grow, Doha has ploughed its profits back into the bank, expanding Tier 1 capital in 2006 by 32%. Like others, it has expanded its Islamic operations and expects to increase its number of Islamic branches from four to seven by year end.

New breed of bank

Masraf Al Rayan is one of a new breed of regional Islamic institutions and chief executive Adel Mustafawi is keen to use its abundant capital in a range of areas, from private equity and venture capital to project finance and capital markets. With 600,000 shareholders, Mr Mustafawi regards his bank as a bridge between Asia and the Middle East; initially his plan is to expand in Qatar and the region, but his five-year plan is to expand in Asia. Also, with a paid-up capital of $1bn, the bank has the size and capital to be involved in major projects, including oil and gas, although at present it is building up its staff and infrastructure. Masraf Al Rayan has 95 staff but Mr Mustafawi expects to have 200 by the end of this year and 500 in three years’ time. While profits in 2006 of $31m reflect the bank’s early days, it is developing fast, with first-quarter profits of $12m, up 56.3% on the previous year.

Another interesting player in Qatar’s expanding financial market is Amwal, which claims to be Qatar’s leading investment banking, asset management and wealth management firm. Run by managing director and vice-chairperson Sheikha Hanadi Nasser Bin Khaled Al Thani, one of a number of well-educated women emerging in business in Qatar, Amwal was the first investment company to be licensed by the Central Bank of Qatar, in 1998. Today, Amwal has a professional staff of 60 and is seen as unique in Qatar as the first pure play investment banking firm in the country, the founder of two mutual funds and a leading wealth management adviser with a strong retail client network. Although Amwal may not compete in the mega deal area, Sheikha Hanadi is bullish about Amwal’s prospects in the medium-sized sector and is confident about her company’s “focus on family” approach to financial planning and wealth management.

Winning ways

Who will be the winners as Qatar’s financial sector starts to fulfil its potential? The well-established domestic players and well-entrenched international heavyweights such as HSBC and Standard Chartered can play to their strengths with good opportunities for all. But Qatar’s financial explosion is just beginning, as demonstrated by Qatar-based investment group Three Delta’s recent purchase of 14.5% of UK retailer Sainsbury.

Given the massive revenues expected in 2009 from the equivalent of six million barrels a day of oil, the country’s financial potential is enormous and open to all. The only rather mild proviso is that institutions need to be there on the ground to reap the rewards.

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