QNB bank branch

Sky’s the limit: Qatar National Bank has seen net profits expand by 9%. Image: Bloomberg

Profits have improved across the sector, even as lending eases following last year’s Fifa World Cup, writes James King.

Banks in Qatar are enjoying a period of sustained growth, thanks to a buoyant domestic economy. Profitability across the sector has soared over the past 18 months, as the country’s lenders have tapped into a range of business opportunities linked to Doha’s hosting of the 2022 Fifa World Cup.

A rising interest rate environment has also helped to nudge bank profits higher, just as elevated hydrocarbon prices of the recent past have improved domestic liquidity conditions and cut most lenders’ reliance on external funding.

Research from rating agency Moody’s indicates that system-wide net profits increased 8% in 2022, driven to a large degree by higher operating income. Qatar National Bank (QNB), the largest lender in the Middle East and Africa region by assets, saw its net profits expand by 9% with operating income up by 24%.

Commercial Bank, meanwhile, registered a 22% increase to its net profits for the period, with its operating income up by 11%.

Performances of this kind were reflected across the conventional and sharia-compliant banking spectrum. Qatar Islamic Bank (QIB), for example, posted a 12.7% increase to its net profits and a 10% expansion of its total income in 2022, contributing to an already-healthy growth trajectory.

“Our commitment to growing our business by catering to our customers’ evolving banking needs has enabled us to consistently outperform the market, increasing our net profit by 66% and total assets by 22% over the last five years,” says Bassel Gamal, group CEO of QIB.

Underscoring this strong, sector-wide performance was an improved set of operating conditions for the year. For one, liquidity indicators across the national economy ameliorated markedly in 2022, with M2 money supply [which includes cash, chequing deposits, and other types of deposits that are readily convertible to cash] up 17.4% for the year, according to the Qatar Central Bank (QCB).

This followed somewhat anaemic growth of just 1.4% and 3.8% over the previous two years. Higher natural gas prices, particularly in the early months of 2022, played a sizeable role in this improving picture.

As domestic liquidity conditions continue to ease, Qatari banks’ reliance on external sources of funding is reducing in parallel. Research from rating agency Fitch notes that non-domestic funding sources accounted for 44% of all funding at the end of the first half of 2022, down from a peak of 47% at the end of 2021.

The QCB has also helped to drive this change, through the introduction of new regulations early last year. In particular, the bank adjusted reserve requirements for foreign-currency-denominated non-resident deposits, among a string of other changes that also impacted banks’ liquidity coverage ratios and net stable funding ratios.

“The central bank has advised Qatari lenders to lower their reliance on international deposits. But to be fair, the banks have been able to lower their share of international deposits quite a bit. They’ve been helped by surplus liquidity in the system in an environment of high oil prices,” says Chiro Ghosh, vice-president of financial institutions at capital markets firm SICO.

As a result, the value of non-resident deposits fell by $30bn between the end of 2021 and February 2023, according to research from S&P Global. In January and February 2023 alone, non-resident deposits fell by a cumulative 8.9%, according to data from the QCB.

Still a way to go

Despite this progress, there is some way to go before the wider Qatari banking system matches regional norms with respect to external funding.

“Structurally, we have a banking sector that’s significantly more reliant on external funding than Saudi Arabia or the UAE, for instance. The proportion of external funding relative to total funding has reduced recently, but remains elevated, particularly in a Gulf Co-operation Council context,” says Amin Sakhri, director at Fitch Ratings.

But as increased natural gas receipts have lifted the government’s fiscal position and boosted domestic liquidity, they have simultaneously impacted Qatari banks’ loan books, at least in the short term.

This is because higher inflows into public coffers have given the authorities greater scope to self-finance a broader range of expenditure, as well as pay down outstanding debt.

This has happened at a time when most of the major project spending for the World Cup had come to an end, meaning some Qatari banks’ loan books continue to be hit hard.

“When oil prices rallied [after Russia’s invasion of Ukraine], the government witnessed a massive boost to their finances,” says Mr Ghosh.

“With a slower project rollout planned after massive spending related to the World Cup, they decided to pay back their overdraft loans to the banks, which negatively hit the Qatari banks’ loan books.”

Total loan growth for 2022 was just above 4%, according to figures from QNB Financial Services (QNBFS). In the opening months of 2023, credit growth across the sector has been muted with the overall system loan book expanding by 0.1% in 2023.

The non-performing loan ratio for the sector rose from 2.2% in 2021 to 2.9% in 2022, following the lifting of Covid-19 support measures, with problem loans particularly concentrated in the real estate and hospitality sectors, according to Moody’s.

Despite the recent slowdown, QNBFS forecasts that loan growth will even out to a mid-single digit range for the full year, as economic activity picks up in the latter half of the year.

This view is shared by Fitch’s Mr Sakhri: “We are forecasting a credit growth of 4% for 2023. The increase in tourism activity and visitors are positive, and the business sentiment is strengthening. The uptick in the liquified natural gas (LNG) project momentum will also create new opportunities for Qatari banks.”

Indeed, the expansion of Qatar’s North Field project will be, after the World Cup, the next major driver of activity for the country’s banking system. Extensive work is expected to commence in 2024 with the ultimate aim of adding six LNG trains, increasing the field’s productive capacity by 64% to 126 million tonnes per annum.

This extra export capacity is expected to come online sometime in 2027 and deliver far-reaching benefits for Qatari banks across the entire energy, engineering and construction value chains.

[It is an] opportunity for us to support large-scale infrastructure development in the coming years

QNB spokesperson

“The banking sector will mainly benefit through credit facilitation in two areas: credit to contractors working on project development and execution, as well as funding of projects in adjacent downstream petrochemical industries and sectors. Furthermore, the economy will benefit from the spillover effects of the LNG expansion on a wider scale,” a QNB spokesperson told The Banker.

“[It is an] opportunity for us to support large-scale infrastructure development in the coming years. We are actively supporting initiatives across the value chain, ranging from wells, pipelines, LNG storage tanks and new LNG tankers, all the way through to expansions of Qatar’s refining and downstream capacity.”

Banking analysts expect the first round of funding for the North Field expansion, which comes with a price tag of about $30bn, to be highly competitive and involve the presence of major international banking groups jostling to support the large, public borrowing measures. As a result, steep pricing competition is envisaged.

Once this stage is completed, however, more funding will be required to support domestic Qatari businesses providing services to the project. This should open the doors to a wider range of the country’s mid-sized and smaller lenders.

From this juncture, the multiplier benefits for the economy and banking system are expected to be realised as project investments filter through to the consumer sector and other non-associated corners of the market.

A sustainable future

But Qatar’s future will be built on much more than gas. In particular, the government is prioritising the development of a sustainable economy which includes, among other targets, a goal of achieving 20% of its electricity generation from renewable energy sources by 2030.

For the country’s banks, developments of this kind, which also contribute to the Qatar National Vision (QNV) 2030 objectives, present significant opportunities.

Leading Qatari banks’ financing portfolios have, for some time, mirrored these priorities as a growing number of environmental, social and governance (ESG)-linked projects populate their books.

“QIB continuously supports projects and institutions whose mission is to deliver sustainable results for the environment, society, and the economy. This progress is reflected in our financing portfolio, with approximately QR3.9bn ($1.07bn) allocated to ‘green buildings’ and pollution prevention and control projects, and QR1.2bn to social financing related to education, healthcare and the support of small and medium-sized enterprises,” says Mr Gamal.

“We are also partners with Qatar Solar Technologies, thus facilitating Qatar’s renewable energy transition as adopted in the country’s national vision. Furthermore, we finance projects that contribute to the decarbonisation of the Qatari economy, enhancing food security and supporting the private sector and local communities.”

While the QCB has stressed its commitment to developing a fintech ecosystem in Qatar for several years, progress has been slow in comparison with neighbouring jurisdictions such as Dubai, Bahrain and Abu Dhabi.

If you look at the domestic cost-to-income ratio, it is way lower than even the regional average

Chiro Ghosh

In March 2023, the QCB launched a new fintech strategy to support “diversification and innovation” within the country’s financial services sector. Through this strategy, the central bank is looking to develop a comprehensive market infrastructure, coupled with an attractive regulatory environment to nurture a world-class fintech ecosystem.

Priority development sectors include distributed ledger technology, electronic know-your-customer systems, payments, ethical and green fintech, and insurtech.

Qatar took a great leap forward on the payments front in August 2022, with the country’s first licences for digital payment services granted to local telcos Ooredoo and Vodafone Qatar. The licensing coincided with the rollout of Google Wallet to Qatar, 12 months after the first launch of Apple Pay in the country.

As the authorities look to embrace financial technology participants to a greater extent, Qatar’s lenders can expect to contend with a more disruptive future.

Lenders in the country are not being left behind, however, with the likes of QNB becoming the first bank in the country to offer an open banking platform for clients and fintechs in June 2022. Though the lender has previously embraced open banking on a more limited basis, through its work with telecoms giant Ooredoo on an e-wallet service, its current open banking initiative is the first of its kind to be offered on a much wider basis in the country.

“For this initiative, we leveraged an application programming interface (API) infrastructure to provide new digital solutions to our customers and other third parties, such as regulated fintech and enterprise resource planning companies, but also the customers of our customers,” says the bank’s spokesperson. “Services included secure data sharing and payment facilitation as well as streamlined access to statements along various dimensions.”

QNB expects to expand the range of services facilitated through its open banking platform, including the provision of foreign exchange APIs. Initiatives of this kind, when married with public sector efforts to promote economic diversification and the presence of higher value-added sectors like fintech, should contribute to longer term development opportunities for the country’s banks.

Optimistic outlook

Indeed, for most Qatari lenders, the outlook remains bright even as economic growth moderates over 2023. For one, profitability should remain healthy even during times of leaner credit growth because many institutions boast exceptional cost-to-income ratios that outperform already-low regional norms.

“If you look at the domestic cost-to-income ratio, it is between 20% and 22%, which is way lower than even the regional average, which is around 28% to 30%,” says Mr Ghosh.

Beyond this, however, is the fact that Qatar’s economy is maturing relatively swiftly and opening up new avenues for growth. The 2022 Fifa World Cup, for instance, has offered a clear boost to tourism and visitor numbers, with 389,000 foreign nationals welcomed in February 2023 representing a 406% increase on the same month in 2022.

Meanwhile, the wider world of sport is also looking to Doha with the Asian Football Cup set to be held in the capital in January and February next year.

“The banking sector remains profitable, efficient and highly capitalised and continues to be a catalyst for economic development and growth,” says QIB’s Mr Gamal.

“For QIB, keeping customers at the core of our strategy, in 2023, we will continue reinventing our business model, exploring new revenue streams, introducing new products and services, and further embed ESG into our strategy,” he adds. 


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