Blockaded by several influential Arab countries since June 2017, Qatari banks have had to cope with ratings downgrades and an outflow of deposits. However, as Kit Gillet reports, they are still posting impressive profits and seem unfazed by such geopolitical unrest.

QNB

In June 2017, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain cut diplomatic ties with Qatar, accusing the country of fostering terrorism, something it strongly denies. The accompanying economic blockade caused the rapid outflow of deposits held in Qatari banks from entities in those countries, threatening the stability of the country’s banking sector.

In August 2017, Moody's cut its outlook for Qatar’s banking system from ‘stable’ to ‘negative’ for the first time since 2010 in reaction to the blockade, citing concerns over the potential outflow of foreign deposits and banks’ ability to access external funding. Meanwhile both Standard & Poor's and Fitch downgraded Qatar’s sovereign credit rating.

Blockade-proof 

However, despite the ongoing geopolitical uncertainties, Qatari banks have continued to post impressive profits and asset growth since the blockade went into effect, and those involved in the sector feel that the main negative impacts have already been felt and overcome.

“Qatar’s banking sector is in good shape and swiftly overcame the initial disruption associated with the economic blockade in the summer months of 2017,” says Joseph Abraham, CEO of Commercial Bank of Qatar (CBQ), one of the country’s largest lenders.

As evidence he points to the total assets of the 18 banks operating under the supervision of Qatar’s central bank amounting to QR1374bn ($376.8bn) at the end of 2017, an increase of nearly 8% from the end of 2016. Profits of these banks also increased by roughly 3.7% in 2017, to hit QR19.7bn. “The fact that Qatari banks are distributing dividends this year despite the economic blockade is another indication of their strength and shows that they are both growing and generating strong profits, highlighting the resilience of the Qatari economy,” says Mr Abraham.

Meanwhile, Sheikh Abdulla Bin Saoud Al-Thani, the governor of Qatar Central Bank, has said that the central bank’s reserves and financial surpluses are “more than enough” to cope with the blockade indefinitely.

Creating confidence

In the immediate aftermath of the blockade, Qatar’s central bank and the nation’s sovereign wealth fund, Qatar Investment Authority (QIA), one of the largest sovereign wealth funds in the world, injected billions of dollars into the country's banking sector in order to offset the non-resident deposits flowing out of the system.

It is estimated that in the first months of the blockade almost $30bn of non-resident deposits left the Qatari banking system, primarily from depositors from the blockading countries. The central bank and QIA pumped a similar amount of money into the banks, allaying fears of liquidity pressure and showing the government’s explicit support for the sector. According to Moody’s, Qatar used $38.5bn, equivalent to 23% of its gross domestic product, to support the economy in the first two months of the blockade.

“The immediate concerns have abated because the outflow has effectively been matched in equal measure by an inflow of government and government-related funds,” says Redmond Ramsdale, head of Gulf Co-operation Council (GCC) bank ratings at Fitch.

Banks are now proactively focusing on raising additional long-term funding at competitive prices for their future operations

Bassel Gamal

He adds that many foreign depositors were probably closely watching during the initial months to see how events would develop. “There was a lot of concern for one or two months but I think the government deposits going into the banks helped to create confidence. The government has said clearly that it supports the banks.”

International relief 

This show of support appears to have successfully allayed fears among most international lenders, outside of the blockading countries, who have continued to keep their deposits in the system. Individual banks have also been involved in outreach among their global investors and clients.

“Investors across the globe weren’t aware of the geopolitical situation and tension. Their reaction was to get to know the market facts, so we’ve engaged in communicating with various parts of the globe, doing roadshows. Through our offices abroad we’ve communicated the facts,” says Dr R Seetharaman, CEO of Doha Bank.

While the actions of the government have shored up the banking system, it has also altered the overall deposit make-up of the country. Before the crisis, overseas customer deposits made up about one-quarter of all deposit funding in the banking sector, but this has fallen to an estimated 18% to 19%, according to Fitch. Governmental deposits in the system have also risen strongly.

“Government deposits in the banking sector formed about 37% of total deposits in February, whereas a year before they were about 26%,” says Mr Ramsdale. At the same time, personal deposits grew 6.38% year on year in February 2018, accounting for 26% of total domestic deposits.

Robust health

Despite the economic blockade, the Qatari banking sector overall remains in good shape. Credit growth was 9.6% in March 2018, on the back of higher demand from the public sector as well as the real estate and consumer sector. “Liquidity in the banking sector remains ample with deposit growth of 9.1% year on year in March 2018. Overall, the banking system remains well capitalised, with a capital adequacy ratio of more than 16%, well above Basel guidelines. Asset quality remains high and has proven resilient, even in times of stress with non-performing loans at low levels of about 1.3% of total loans. This has resulted in continued and solid profitability of the banking sector, substantiated by returns on equity of about 14%,” says Ali Ahmed Al-Kuwari, group CEO of Qatar National Bank (QNB), the country’s largest bank.

Meanwhile oil prices are steadily increasing, which should lead to an increase in deposits in the banking system, enhancing liquidity and increasing potential for lending growth in the public and private sector, adds Mr Al-Kuwari.

The country’s foreign exchange reserves have remained broadly stable at about $38bn as of February 2018, according to QNB data, the equivalent of roughly six months of import cover.

Qatari banks have also continued to focus on improving efficiency. An April 2018 report by KPMG focused on the 56 listed banks in the six-country GCC region found that listed banks in Qatar continue to have some of the lowest cost-to-income ratios in the region, with the country's financial institutions making up five of the top six banks when it comes to cost to income as of the end of 2017. Islamic lender Masraf Al Rayan topped the list with a cost-to-income ratio of 21.1%, followed by Qatar Islamic Bank (QIB) and Qatar International Islamic Bank (QIIB) with 26.6% and 27.3%, respectively. The report also found that listed banks in Qatar had the highest asset growth rates in the region in 2017, with an average 5% rise in net profits and 8.1% growth in total assets between 2016 and 2017.

Five percent for 2018 is still reasonable growth, and might exceed some of the other GCC countries

Redmond Ramsdale

Among the listed banks, QNB saw the highest growth in assets in 2017, up 12.7% to QR811bn, followed by Masraf Al Rayan and QIIB, with rises of 12.5% and 9.6%, respectively.

A growth story 

This growth has continued in the first quarter of 2018. QNB saw net profits of QR3.4bn, up 7% year on year, driven mainly by an operating income increase of 12% over that period. According to Mr Al-Kuwari, the bank expects 2018 to be a year of continued growth, with the group as a whole experiencing growth in the region of 9% to 11% in terms of overall balance sheet, and 6% to 8% in terms of profit.

In 2016, QNB completed its takeover of Turkey’s Finansbank. It also purchased a 97% stake in Egyptian lender NSGB in 2013. “The economic prospects in our three core markets are favourable, says Mr Al-Kuwari. "Being one of the leading banks in each of these markets should enable us to capitalise on the growth opportunities presented.” QNB also owns a 23.5% stake in pan-African lender Ecobank, and, according to recent reports, is targeting potential acquisitions in south-east Asia as it continues to focus on fast-growing markets outside of Qatar.

Other banks also saw continued growth in the first quarter of 2018. QIB, Qatar’s leading Islamic bank, saw net profits rise 12.6%, with total assets up 6%. Meanwhile QIIB saw net profits of QR253.2m, up 7.1% compared with the same period of 2017, with total revenues amounting to QR517.3m, up 12.5%. Doha Bank saw its net profits rise 4.7% year on year in the first quarter, with total assets up 3.2% and customer deposits increasing 9.9% over the period.

Doha Bank’s Mr Seetharaman points to the 3% lending growth rate seen across the Qatari banking sector in the first quarter of 2018, and adds that while banks’ borrowing costs have gone up, and are now marginally higher than before the blockade, “that’s also due to interest rate hikes by the US Federal Reserve.”

“We are predicting 2.6% economic growth [in 2018], predominantly from non-hydrocarbons. That also gives a stimulus to the banking sector, where we expect to see a 4% to 5% growth in the market,” he adds.

Islamic merger

The Islamic banking sector in Qatar has continued to grow, and has been involved in financing some of the major infrastructure projects taking place in preparation for the 2022 World Cup, as well as the country’s National Vision 2030. The continued growth of Islamic finance in Qatar has resulted in Islamic banks outperforming their conventional counterparts, “with the share of Islamic assets in the local banking sector now accounting for more than one-quarter of total banking assets, QR359bn, as of March 2018”, says Bassel Gamal, group CEO of QIB.

QIB, the largest Islamic bank operating in Qatar, as well as the second largest bank overall in the country with an 11% share of total assets, has continued to increase its foothold in the Islamic finance market. The bank currently has a 42.3% market share in terms of sharia-compliant assets. However, a potential merger between Islamic banks Masraf Al Rayan and Barwa Bank, as well as conventional lender International Bank of Qatar, could create a strong rival to QIB. The new bank would operate under Islamic banking principles.

Discussions on the potential merger were initially announced in December 2016, though the banks missed a target date of the end of 2017 for the deal to go through. The merger, if it happens, would create the second largest bank in the country and one of the largest Islamic banks in the region, with more than QR180bn in assets. “The three-way merger would create the largest Islamic bank in Qatar. It would be akin to the Islamic QNB,” says Fitch’s Mr Ramsdale.

In April 2018, Qatari central bank governor Mr Al-Thani voiced his support for the deal in an interview with a local publication, but added that it depended on factors such as shareholder support, with the central bank also waiting on a report on the merger from its financial advisers.

While no formal announcement has been made, the merger is clearly not dead, though the current geopolitical landscape may be having an impact on the speed of the process. “I think the political dispute slowed this down, and whether it happens or not is all down to whether shareholders can sufficiently realise value from the merger,” says Mr Ramsdale. 

Looking ahead

Tensions between Qatar and its neighbours seem unlikely to end soon. In February 2018, Qatar asked the US Treasury to investigate NBAD Americas, the US subsidiary of First Abu Dhabi Bank, accusing it of waging “financial warfare” against Qatar, including “through the manipulation of Qatari currency and securities markets”, according to a report from Reuters.

Meanwhile, in early April 2018, Qatar raised $12bn through a bond sale, with the transaction reportedly attracting $53bn of orders. The last time Qatar tapped the bond market, in 2016, the country raised $9bn.

A day before the latest bond issuance, Saudi Arabia held its own last-minute $11bn bond sale, which some have pointed to as a sign of the continuing rift between the countries. “The Saudi bond came as a surprise, but it didn’t destabilise Qatar’s offering. This showed international investors’ commitment to Qatar,” says Mr Seetharaman.

Qatari banks are also looking to shore up foreign funding. In April 2018, CBQ signed a $250m two-year loan facility syndicated in the Asian market, with the funds helping to diversify the bank’s funding sources. Doha Bank is also considering a bond issuance.

“Banks are now proactively focusing on raising additional long-term funding at competitive prices for their future operations,” says QIB’s Mr Gamal. “At the same time, overseas money is starting to return as non-resident deposits grew by more than 7% since December 2017,” he adds.

According to a February 2018 report by Fitch Ratings, in December 2017 non-resident interbank and customer deposits at Qatar’s commercial banks grew for the first time since the blockade began in June 2017. Meanwhile, Fitch expects growth of about 5% for the Qatari banking sector in 2018, down from about 8% in 2017, but “5% for 2018 is still reasonable growth, and might exceed some of the other GCC countries”, says Mr Ramsdale.

Despite some initial concerns related to the blockade and its impact, it looks as though Qatar’s banking sector will continue to impress.

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