Qatar was the fastest growing economy in the world during the period 2008 to 2013, with a compound annual gross domestic product (GDP) growth rate of 10.7%. This was largely based on the development of its large hydrocarbon resources, according to research from Qatar National Bank (QNB), the country’s largest lender. Since mid-2013, however, the country's economy has entered a new diversification phase, driven by large investments in the non-hydrocarbon sector in preparation for the FIFA World Cup 2022 and in line with Qatar’s 'National Vision 2030' to become a diversified knowledge-based economy.
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As a result, the non-hydrocarbon sector grew by 11.5% in 2014, with double-digit growth in construction, services and transportation, according to QNB data. The bank expects this double-digit growth to continue in the non-hydrocarbon sector, at least until 2017, as the government ramps up its investment spending to the tune of about $200bn over the next five years. Ratings agency Fitch has reported that this growth reflects both the high levels of investment and a rapidly expanding population, which was up by 9.5% year on year in March 2015. According to Fitch, the country's real GDP growth reached 6.2% in 2014.
Ripe for growth
All the Gulf countries are engaging in deficit financing. "They are all going to spend money on projects such as the Qatar 2022 FIFA World Cup, and that is going to have an impact on GDP growth, which in Qatar’s case should be over 7% this year,” says Dr R Seetharaman, CEO of Doha Bank.
Despite the oil price weakness since 2014, Qatar's long-term growth story looks robust, undergirded by an active infrastructure project pipeline, which is geared around the 2022 FIFA event. The interim budget released earlier in 2015 has devoted a large slug of state finances to major development schemes, including health and education.
The banking sector is benefiting from the tailwinds of the fast-growing economy. “In 2014, banking assets grew by 10.5%, driven by the large expansion of credit to the economy [13.1%]. The main sectors of this credit growth were in the private sector, particularly consumption, general trade and services. This rapid credit expansion was underpinned by a strong deposit growth [9.6%],” says a spokesperson from QNB.
Leading Qatari bankers are keenly aware of the growth boost that has resulted from the accrual of massive hydrocarbons export receipts. The sovereign's capacity to support the banking system is sustained by its sovereign wealth funds and ongoing revenues, mostly from its hydrocarbon production. “The investable surplus that Qatar has as a result of the boom from the natural gas supply chain – more than $40bn – has provided an enormous impetus for non-hydrocarbon investments, with more than 30% of GDP now coming from the non-hydrocarbon sector,” says Mr Seetharaman.
According to a spokesperson from Commercial Bank, the Qatari government has reaffirmed much of its investment commitments in the run up to the 2022 World Cup and the National Vision 2030. “No matter where the government allocates its budget, Commercial Bank will lend support across all sectors, but the bank sees infrastructure, healthcare, education and related sectors as particular areas for loan growth. Through our well-established wholesale banking division, Commercial Bank has a strong presence in infrastructure and contract finance, and we are a major issuer of guarantees for large projects in Qatar,” says the spokesperson.
Spending spree
None of this means that Qatar is immune to the market downturn. The International Monetary Fund’s Article IV assessment released in March warned that the impact of low oil prices – affecting liquified natural gas exports with a time lag – might put the Qatar government at risk of showing a budget deficit in 2016. But then, that would also indicate the authorities’ commitment to continued spending, which in turn will provide the local economy – and the banking sector – with a welcome fillip.
“There have been some project cancellations, but these are mostly non-core schemes,” says Timucin Engin, a Gulf bank analyst at ratings agency Standard & Poor’s. “The overall expectation is that government spending will continue, albeit with a stronger focus on fiscal discipline than before. The government is not necessarily scaling down projects, but it is implementing them more gradually – and not frontloading everything at once.”
This should fuel lending growth this year. Return on equity in the banking sector was 16.5% in 2014, with a very low level of non-performing loans (NPLs), at 1.7%. As of April 2014, banks already comply fully with Basel III capital adequacy standards, with a capital adequacy ratio of 12.8% at the end of 2014.
Looking ahead, there seems little obstacle to double-digit expansion of the banking sector in Qatar. “We expect asset growth averaging 11% over 2015 to 2017 as demand for project financing picks up and as lending to consumption, general trade and services continues to be strong on the back of the rapidly growing population,” says the QNB spokesperson.
Qatari banks have been in a position to grow their loan books at a brisk pace, in tandem with the 2022-focused infrastructure buildout.
Qatar’s real GDP is forecast to expand by 7% in 2015 as a combination of vast government resources and a lower fiscal breakeven level will continue to support elevated public spending and hence drive economic expansion, according to Nitish Bhojnagarwala, a Gulf bank analyst at credit rating business Moody’s. “So while credit growth is expected to be lower than 2014, Qatari banks may get more lending opportunities to support infrastructure projects,” he says.
Qatari banks have been able to build assets at a faster pace than their regional counterparts, according to Bassel Gamal, group CEO at Qatar Islamic Bank (QIB), and this growth is expected to continue in the coming few years. “It is estimated that in 2014 to 2017 alone, the country will spend approximately $154bn in capital investment projects. In addition, a rising population is also expected to increase aggregate local consumption and demand for retail financial services. Within this climate, we will continue to primarily finance companies and projects contributing to the country’s development as well as cover all the financial needs of individuals living in Qatar [local and expatriates alike],” says Mr Gamal.
Modest expectations
Though Qatari banks could face liquidity declines as lower oil prices reduce the flow of deposits from the government and government-related entities – the largest depositors in the system – Mr Bhojnagarwala points out that the banking system maintains a healthy stock of liquid assets at about 28% of system assets, leaving some headroom to adjust to changing funding conditions in an orderly fashion.
Lending growth should pick up pace, says Doha Bank’s Mr Seetharaman. According to the Qatar Central Bank (QCB) data, total credit extended by Qatari banks still increased 3.5% between December 2014 and March 2015. “In terms of credit expansion, we should be doing between 12% to 15% this year, extrapolating from the 3.5% increase seen in the first quarter of 2015,” says Mr Seetharaman.
Yet analysts are less optimistic. “We expect credit growth of 9% this year and next, which compares with 13% seen in 2014,” says Mr Engin. “We see some impact of declining oil prices potentially on deposit growth. At year-end 2014, about 38% of local banking deposits were provided by government and public sector entities, and we might see slower deposit growth from this segment given its revenue generation will be somewhat lower."
S&P says that net interest margins (NIMs) could arguably contract a bit more. “The past few years have seen a visible decline in NIMs, but that was largely coming from a very competitive corporate loan pricing climate, the earning yield was declining," says Mr Engin.
Fee income growth will also be slightly slower. All in all, says Mr Engin, return on assets will be lower. Qatari banks are trying to increase their non-interest income – largely fees – by increasing their product offering, through treasury products, cash management and trade finance. “We’ve seen Qatari banks opening representative offices in Asia in order to tap into the trade finance pool,” he says.
Global aspirations
The reporting season for the first quarter of 2015 revealed no major surprises in terms of profit performance. QNB reported a 10% increase in first-quarter net profit to $735m, supported by higher lending activity. “QNB Group expects another year of strong growth in 2015, following its double-digit expansion in 2014,” says a spokesperson for QNB.
As of the end of March 2015, QNB Group assets grew by 9% year on year to reach $137.8bn, while the ratio of NPLs fell to 1.5% of total gross loans. The bank’s capital adequacy remained high at 15.1%. Looking ahead, QNB expects growth in assets of 7% to 9% for 2015 and continued strong profitability. The Middle East and north Africa region’s largest lender is looking to become a truly global bank by 2030, and already operates in more than 27 countries across Europe, Asia and Africa. In line with its vision, QNB Group has acquired a 20% stake in Ecobank Transnational Incorporated, a leading pan-African bank.
Doha Bank reported a 5.2% increase in first-quarter net profit to QR420.2m ($115.45m). Loans and advances at the end of March stood at QR50.8bn, a 17.1% year-on-year increase. The solid performance reflects Doha Bank’s business model, which is correlated to the Qatar and Gulf economies, according to Mr Seetharaman, although the bank is increasingly looking further afield. “When you look at the loan book, 75% of it is Qatar, 25% is outside, mostly in the Gulf region. We have acquired an Indian licence and have three branches there," he says.
Doha Bank has captured global trade opportunities by liaising with institutions operating in the Gulf countries. “When they come to the region, we support them in their funded and non-funded business, and that has driven our sustainable growth over the years, though the boom and the downturn,” says Mr Seetharaman.
In early April, Doha Bank completed the acquisition of HSBC Oman’s Indian assets, taking over the operations of its two branches in Mumbai and Kochi, thereby bolstering its position in the sub-continent – an increasingly pivotal strategic trade partner for Qatar. “We are concentrating on global trade, which is why I have set up representative offices in Asia, whether Japan, South Korea, Singapore or now India. These give prime-mover advantage,” says Mr Seetharaman.
Islamic success
Commercial Bank, the country’s second largest lender, says its long-term sustainable approach to profit growth is reaping rewards. “In the first quarter of 2015 this approach, combined with tight cost management and prudent provisioning, delivered a 19.5% increase in net profits as compared with the final quarter of 2014,” says the spokesperson.
“It is extremely important to have good cost management policies and our first-quarter 2015 quarterly cost-to-income ratio is down to 38% from 40% compared with the same period in 2014,” says the spokesperson. "Despite the current economic climate, there are still opportunities to grow income and it is important to ensure that these are tapped. Commercial Bank looks at generating a positive jaw ratio [the gap between revenue and cost] to ensure that cost is efficiently utilised.”
Confirming the resurgent Islamic sector performance, QIB – the country’s largest sharia-compliant lender by assets, reported a 19% jump in first-quarter net profits to QR400m. In 2014, its loan book surged by 27% to QR60bn. “We increased business volumes across all business segments while at the same time improving efficiency within the group. Our corporate portfolio grew 29% year on year, while the personal portfolio grew 18% year on year,” says Mr Gamal.
According to the latest published data from the QCB, QIB has increased its market share to 36.9% of the Islamic banking sector and to 9.5% of the total banking assets in Qatar as of December 2014.
Similar to other Qatari lenders, QIB is also thinking increasingly in cross-border terms. As Mr Gamal says, when the pace of infrastructure projects slows down, and the number of projects decreases in future, Qatari banks might start increasing their investment in regional markets to grow and diversify revenue. “As QIB, we are already present in the region both by supporting our Qatari clients’ expansion abroad as well as by participating in syndicated financing together with other Islamic banks for larger deals. This is a trend to continue in the future.”
QIB is reported to be looking to raise up to QR2bn through a capital-boosting sukuk, rebuilding its capital reserves in the wake of its active lending programme. “We are issuing the sukuk to support our strong growth, including the possibility to continue financing long-term infrastructure projects, predominantly in Qatar, while managing our own cost of funds and capital adequacy ratios at the same time,” says Mr Gamal.
Mr Gamal notes that sukuk issuance gives Islamic banks the opportunity to diversify further their funding profile and improve the capital base.
QIB, similar to its conventional counterparts, will be looking to develop its portfolio in line with the region’s robust fundamentals. All eyes are sharply focused on 2022, when the Gulf country opens its doors to the world’s biggest sporting spectacle. By that point, some of its lenders could be as familiar to the global audience as the footballing behemoths that will be competing for glory on Qatari turf.
