The ongoing political and economic rift between Qatar and the United Arab Emirates, Saudi Arabia, Egypt and Bahrain continues to have repercussions for many sectors of the Qatari economy, and the banking sector is no exception. Even so, according to industry insiders the Qatari banking sector is in good shape and confidence has been fully restored following the early days of the economic blockade in June 2017, when a rapid outflow of non-resident deposits rattled the sector.
“The Qatari banking sector remains sound. Local market liquidity has definitely improved, and the cost of funding is coming down compared with the beginning of the blockade,” says Dr R Seetharaman, CEO of Doha Bank, one of Qatar’s largest lenders. “The sector’s risk profile is improving, but it still isn’t strong compared with the profile we had before June 2017, when the blockade started,” he adds. “The loan-to-deposit ratio has been really under pressure, at 125% to 130%. Now it's back on track: the loan-to-deposit ratio in March was 114%, and deposit growth was 4.5% in the first quarter of 2019.”
A rise in ratings
In October 2018 Moody’s changed its outlook for Qatar's banking system from 'negative' to 'stable', reflecting the resilience of the country's economy and banking system to the ongoing regional dispute, the ratings agency said.
"The Qatari economy has rebalanced as supply chain disruptions recovered rapidly following the blockade from other Gulf states and Egypt," Nitish Bhojnagarwala, vice-president and senior credit officer at Moody’s, said at the time. "Likewise, the banking system rebalanced its funding profile with the reduced liquidity from Gulf Co-operation Council sources offset by inflows from government and related entities,” he added.
Moody’s found that public sector inflows had effectively stabilised domestic liquidity, reducing Qatari banks' reliance on market funding and offsetting funding pressures linked to the ongoing geopolitical tension. Meanwhile, the agency predicted that loan performances would remain broadly stable, with the economic slowdown in recent years, coupled with challenges in the construction and contracting sectors, resulting in only modest pressure on their performance. System-wide problem loans were expected to increase from 2% in 2018 to about 2.2% to 2.5% of gross loans by 2019.
At the same time, the ratings agency predicted average real gross domestic product (GDP) growth of 2.8% between 2018 and 2022, up from 1.6% in 2017.
Returning confidence
The 2017 blockade by four of its neighbours led to a rapid outflow of external financing for Qatari banks, mostly in the form of non-resident deposits and inter-bank placements. According to S&P Global Ratings, outflows of non-resident funding had reached roughly $22bn (equivalent to 13% of Qatar’s GDP) by year-end 2017, “about three-quarters of which was related to the boycotting countries repatriating deposits they had in Qatar.”
However, those deposits were quickly replaced by liquidity injected by the Qatar Central Bank and entities such as Qatar Investment Authority, one of the largest sovereign wealth funds in the world, to the tune of about $40bn, which helped to mitigate any damage. Non-resident deposits have gradually recovered to pre-boycott levels, according to S&P, “demonstrating investor confidence in the financial sector”. Non-resident deposits increased 23.3% year on year in December 2018.
There are currently 18 banks operating in Qatar, serving a population of roughly 2.6 million. Total banking sector assets grew by 4.1% year on year in March, the latest figures available, according to Qatar National Bank (QNB), with bank deposit growth and credit growth both at 3.1%.
“Despite the economic blockade, deposit and loan growth remained strong,” says a spokesperson for QNB, the country’s largest lender. “The banking system remains well capitalised with banks’ capital adequacy ratio above 16%, well above Basel III guidelines. Asset quality also remains high with non-performing loans [NPLs] steady at 1.7%. Profitability remains solid with returns on equity close to 14%,” he adds.
QNB saw net profits of QR13.8bn ($3.8bn) in 2018, up 5% year on year, with total assets up 6% to QR862bn. Customer deposits also increased by 5%, while the bank’s cost-to-income ratio dropped from 29.1% to 25.8%, with a loan-to-deposit ratio of 99.3% as of December 31, 2018. The 2018 results were considered among the best in the bank’s 55-year history. NPLs came in at 1.9%.
Raising funds
One clear sign of the overall confidence in the Qatari banking sector, and the economy as a whole, has been the ease at which Qatar and Qatari banks have been able to raise external funds. According to a report by Oxford Business Group, Qatar’s banks issued a combined $7.4bn-worth of foreign currency-denominated bonds in the first half of 2018 alone.
“In 2018, Qatar returned to 'business as usual' on its transformation journey towards a sustainable, knowledge-based economy, and Qatari banks have found little difficulty raising funds in 2019 from the international investment community,” says Joseph Abraham, group CEO of Commercial Bank of Qatar (CBQ), the country’s third largest lender by assets. CBQ, which is in the third year of a five-year strategic restructuring aimed at cleaning its loan book and improving operational effectiveness, saw net profits of QR1.7bn in 2018, up 175.5% year on year. The bank also reduced its cost-to-income ratio from 37.5% to 33.4%, closer to the Qatari average.
In addition to the banks, the country appears to have had little difficulty raising funds. In March 2019, Qatar sold $12bn in bonds, attracting demand of about $50bn. This followed a similar sized issuance in April 2018, which was also heavy oversubscribed.
This demand emphasises the “strong investor appetite for Qatar’s long-term debts,” says Bassel Gamal, group CEO of Qatar Islamic Bank (QIB), the country’s largest Islamic bank. He adds that QIB issued its own $750m five-year sukuk in March 2019, which was 4.1 times oversubscribed. Almost half of the sukuk (46%) was sold to Asian investors, with 23% going to Middle Eastern investors and 21% to Europeans.
A little local tension
The geopolitical standoff between the countries has filtered down to the banking sector. In March, Qatar said it would no longer allow First Abu Dhabi Bank (FAB), the largest bank in the UAE, to provide financial services to new customers in Doha. This followed accusations of currency manipulation against the bank.
Qatar has accused its neighbours of attempting to devalue its currency, securities and derivatives markets, and in 2018 asked US regulators to investigate the US subsidiary of FAB as part of its concerns. In April, Qatar filed lawsuits in London and New York against FAB, as well as Saudi Arabia's Samba Bank and Luxembourg-based Banque Havilland, alleging financial market manipulation aimed at undermining its currency and bonds.
Meanwhile, Qatari banks have been reducing their exposure to the UAE, primarily though asset swaps with UAE-based banks. “We have reduced our exposure,” says Doha Bank’s Mr Seetharaman. “From about QR6bn, we have brought it down to QR2.2bn on the UAE side. We are de-risking the bank and concentrating more on Qatar and the local economy,” he adds, though the bank plans to maintain a scaled-back UAE presence in case the geopolitical situation improves.
Doha Bank saw net profits fall by more than 25% in 2018, to QR830m, after the bank took significant loan loss provision. The bank’s net operating income stood at QR2.6bn, with total assets of QR96.1bn.
Meanwhile, CBQ has been trying to sell its 40% stake in UAE-based United Arab Bank, but so far no deal has been announced.
M&A movement
With a relatively small domestic market, mergers within the Qatari banking sector have long been discussed. In late 2018, Barwa Bank and the International Bank of Qatar (IBQ) reached a final merger agreement, with the official completion of the merger taking place in April. The new sharia-compliant bank, which will have total assets of QR80bn, is to be renamed Lusail Bank.
“We are proud to be part of the first bank merger in Qatar. It is no small feat to have brought together two of Qatar's ambitious financial institutions under one consolidated entity,” Omar Bouhadiba, managing director of IBQ, said at the time, adding that both parties are confident the combined entity will play an integral role in reshaping the domestic industry.
Further mergers and acquisitions could also take place in the medium term. “Qatar has 18 banks regulated by the Qatar Central Bank all competing for business in a relatively small domestic market,” says CBQ’s Mr Abraham. “With margins under pressure, conditions are favourable for further consolidation, but we expect the proposed merger between IBQ and Barwa to play out first before we see any further movement in local banking M&A activity,” he adds, saying that a merger involving CBQ is not part of the bank’s current plans.
Qatari banks are also continuing to grow their foreign operations. In 2016, CBQ completed its takeover of Turkish lender Alternatifbank, the same year that QNB completed its takeover of Turkey’s Finansbank. Other banks have also been expanding abroad.
“International operations are increasingly important as QNB continues to diversify its portfolio to balance risk and ensure future revenue opportunities within its core markets and beyond to south-east Asia,” says the QNB spokesperson, with the bank now present in more than 31 countries across Asia, Africa and Europe.
Islamic finance hopes
According to Qatar Central Bank, Islamic banking assets accounted for 24.7% of total banking sector assets as of March 2019, marking a steady increase from 20.9% in December 2010. The total assets of Qatar’s four Islamic banks rose by 1.77% in the first nine months of 2018, while assets grew 3.81%. Over the past five years the growth of Islamic banking sector assets outpaced those of the conventional banking sector, with a compound annual growth rate of 13%, compared with 11% for the conventional banks.
“The Islamic banking sector of Qatar has recorded many significant achievements over the past few years as it has continued to strengthen its capabilities in becoming mainstream by having the products and services, as well as the capacity, to structure and finance major projects in Qatar,” says QIB’s Mr Gamal. QIB posted a net profit of QR2.75bn in 2018, up 14.5% on 2017 figures, with total assets up 2% to QR153.2bn.
Qatar is targeting a greater involvement in the $2000bn global Islamic finance market, and in 2018 launched the world's largest single-country Islamic exchange-traded fund, with initial assets of $120m. “Our vision is to cover the entire globe’s Islamic financial transactions between three financial centres: Qatar, Turkey and Malaysia,” says Sheikha Alanoud Bint Hamad Al-Thani, managing director of business development at Qatar Financial Centre (QFC), a business and financial centre located in Doha. In that equation, Qatar would serve the greater Middle East region.
Qatar also announced earlier in 2019 the establishment of Energy Bank, a sharia-complaint financial institution that, according to those involved, is set to become the largest Islamic energy-focused bank in the world. Based in the QFC, the investment bank, which is expected to be operational in late 2019, will focus on oil and gas, petrochemicals and renewable energy projects both domestically and globally, with a targeted capital of $10bn.
Following fintech
As well as strengthening its position in global Islamic finance, Qatar is eyeing a leading role in the Middle East when it comes to the growth of fintech. Under Qatar's current strategic plan for the financial sector, running from 2017 to 2022, fintech has been recognised as key area for achieving long-term development goals for the financial sector.
In October, the central bank governor, Abdulla Bin Saoud Al-Thani, announced the upcoming launch of a banking service platform to support and promote fintech. Meanwhile, in April 2018 Qatar Fintech Hub signed a memorandum of understanding with Lithuania’s Fintech Hub Lt to contribute to the development of the fintech industry.
“With recent initiatives by the government, fintech is gaining momentum. The infrastructure, competencies and government support will facilitate fostering fintech culture in Qatar over the next [two years],” says Mr Seetharaman.
Banks are also aware of their need to adapt to this new landscape. “The rapid pace of innovation and digital transformation is increasing pressure on the banking sector as new non-bank incumbents, such as big tech companies, fintech and digital platform companies are increasing competition and eroding margins,” says the QNB spokesperson.
Qatar’s banking sector continues to grow, as well as look to the future, even while the uncertainty of the blockade remains.
