A look at the data trends shaping Qatar’s banking sector reveals an industry in good health, from domestic credit growth to the provisions held by commercial banks. While public sector credit growth may have reduced from the highs experienced just a few years ago, it is nevertheless on the increase again, albeit at a slower pace. In addition, provision levels are healthy, despite some minor fluctuations recorded over the past six months in response to adjustments from the country’s largest lenders. Meanwhile, the central bank’s real estate price index has maintained its upward momentum, representing an ongoing point of concern for Qatar’s banks.
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Despite recording a marginal decline in the latter months of 2014, total domestic credit provided by Qatar's commercial banks expanded in the first quarter of 2015. In all, total credit extended grew 3.5% between December and March. This was largely driven by healthy growth from the country’s private sector, recording a 6.2% increase over this period. Credit to the services segment expanded 7.4% between February and March of this year, while consumption-based credit grew by 4.3%.
Public sector growth
Meanwhile, in the public sector credit growth showed signs of month-on-month increases in the first quarter of 2015 after experiencing a marginal decline through the course of 2014. According to figures from the Qatar Central Bank, total domestic public sector credit extended in April 2014 reached QR243.1bn ($66.79bn), compared with QR217bn in January this year. This contraction occurred partly as a result of the government scaling back or delaying non-essential projects in response to falling oil prices.
Yet, public sector credit figures are now improving. The data shows a 1.5% increase in February 2015, before a further jump of 4.5% in March. As such, total public sector credit rose to QR230.5bn by the end of March this year. These improving figures reflect an acceleration of the country’s priority development projects, as well as an increase in activity as deadlines for some of the developments, set for 2018, draw closer.
In all, as the data indicates, total domestic credit growth is reasonably healthy. The consensus view, shared by Qatar National Bank (QNB) and the Qatar Investment Fund, is that total credit growth will remain in the double digits over the medium term on the back of strong non-hydrocarbon growth, developments around the hosting of the 2022 FIFA World Cup, and the country’s expanding population, although some analysts expect this number to be in the high single digits.
As the data shows, an area of ongoing concern for both Qatar’s lenders and the wider economy is the increase in real estate market prices. The real estate sector was a source of unease for the Qatari government during the financial crisis, as tumbling prices contributed to an increase in banks’ non-performing loans.
While government support to the financial sector was swift, including share purchases and the acquisition of a number of lenders’ real estate portfolios, the rapid increase in property prices is once again raising fears of a bubble emerging in the market.
Rising real estate
According to the Qatar Central Bank’s real estate price index, which measures property prices based on suburb-level real estate transaction data, the value of the country’s property market rose 34.7% year on year in December 2014. This trend continued in the first quarter of 2015, with incremental growth pushing the index 34.1% higher in March than the previous all-time high registered in late 2008.
The implications for the banking sector are nevertheless unclear. On the one hand, credit growth to the real estate and construction sectors has surged in recent times. According to data from QNB, the real estate sector accounts for about 27% of all private sector loans in the country, growing 5.9% between December 2014 and January 2015.
This trend looks set to continue over the near to medium term as project implementation, particularly in preparation for the 2022 FIFA World Cup, rising incomes and a booming population put pressure on housing supply. As such, should a correction in the real estate market occur, Qatar’s lenders would once again be left relatively exposed.
On the other hand, research from QNB Economics in August 2014 found the real estate price index was still in line with the country’s broader economic fundamentals, including the rise in per capita gross domestic product as well as population growth, although the bank noted that real estate prices were then close to the natural limit of these base figures.
Sovereign intervention
The government’s earlier support of the banking sector during the crisis, including the purchase of their real estate portfolios, points to the sovereign’s willingness to intervene. While it is not clear that such support will be forthcoming in the future, particularly as budgetary pressures increase, it is nonetheless a positive precedent.
In terms of the data covering provisions in commercial banks, some movement was seen in the latter half of 2014, with a notable decline occurring from September. It should be noted, however, that given the structure of Qatar’s banking sector, whereby QNB and a few other leading lenders account for the majority of system-wide activity, any fluctuation in provisions from these players will considerably impact this data.
For instance, Commercial Bank substantially increased its net provisions for loans and advances for the quarter ending March 31, 2015, reaching QR170.2m, up from QR50.8m in the same period last year. Similarly, Doha Bank’s loan loss provision coverage ratio increased in the first quarter of 2015 to 121.1% from an average of 113.8% in 2014.
