Huge hydrocarbon reserves and modern infrastructure are creating a gold-rush mentality among bankers, with local banks’ profits rising and foreign institutions trying to get a look in. By Stephen Timewell in Doha.

Qatar’s booming economy is proving to be a bonanza for banks. Well-established local institutions have boosted profits and new regional players are buying in to get a slice of the huge opportunities available. Despite events in Iraq, investors and bankers are seeing the massive potential offered by Qatar’s unique hydrocarbon reserves and the modern infrastructure put in place in recent years.

“There is a gold rush mentality,” notes one banker. And, with huge surplus funds now available, the challenge facing bankers is which opportunities to select among the range of projects and market developments that are emerging.

Prospects did not always looks so bright in Doha. At the end of the 1990s, low oil prices and efforts to develop the North Field, the single largest natural gas field in the world, led to a mounting debt problem. Also the collapse of Qatar’s largest private sector company, Mannai Corporation, caused distress throughout the banking sector.

Handsome income

Those issues are firmly in the past, however, and in some ways have provided useful experience for the future. Now the investment in liquefied natural gas (LNG) capabilities is beginning to pay off handsomely and rising LNG exports plus oil prices – which are at record highs of around $40 per barrel – are providing a visible and diverse income stream that is attracting massive interest.

Key to the banking optimism is the expansionary macroeconomic picture and the significant increases in government expenditure. In the recently announced 2004/2005 state budget, capital expenditures are up 44.3% to Qr8.9bn ($2.4bn) following a 32% rise the previous year. These increases, which represent a strong focus on social and health care as well as education and youth welfare, will act as a catalyst in boosting private sector activities.

And the revenue projections also look extremely positive. Economists note that the 2004/2005 projected budget deficit of Qr2.2bn is based on an oil price assumption of $19 per barrel and would become balanced if oil prices averaged just $21.5 per barrel. Given that prices are expected to average well in excess of this price, Qatar is likely to be in considerable surplus even with its increased expenditure – an encouraging sign for bankers.

Banks assets grow

The past few years for banks have closely reflected the overall rapid economic growth. First quarter results for 2004 suggest that this trend will continue. In 2003, aggregate figures for the 14 commercial banks (including seven foreign banks) provided by Qatar Central Bank showed that total assets grew by 21.5% to Qr76.1bn, more than 50% higher than 2000 totals. This 2003 growth reflected a 20.9% expansion in aggregate lending and a 15.7% rise in customer deposits.

Banks have not missed the opportunities and aggregate net profits rose 33.9% in 2003 to Qr1.7bn, almost double the aggregate profits of 2000. Profitability of the Qatar banks also rose significantly with the aggregate return on equity ratio rising to a healthy 22.4% in 2003 from 17.3% in 2002. And profits continue to grow with aggregate first quarter 2004 profits reaching Qr520.4m.

Foreign bank branches, which include Arab Bank, Bank Saderat Iran, HSBC, Mashreqbank, BNP Paribas, Standard Chartered and United Bank, account for an important but relatively small part of the market. In asset terms, the foreign banks have 13.3% of the total, but in loans only 8.7% and deposits 7.7%.

However, these commercial branch figures understate the role of foreign banks in the economy and the increasing role of foreign and regional institutions in Qatar’s overall financial development. The involvement of Bahrain’s Ahli United Bank and National Bank of Kuwait in local banks in the past month (see box) reflects the growing regional interest in the market and the desire to create stronger financial institutions in the Gulf Cooperation Council (GCC).

Piece of the action

Large regional players, such as Bahrain’s Gulf International Bank and Arab Banking Corporation, have the size and expertise needed to help finance major infrastructure and petrochemical projects. And many other international institutions are keen to get a piece of the Qatar action and play a part in financing the huge borrowing requirements for the mega projects in the pipeline. According to specialist publication, Middle East Economic Digest, there are projects looking for financing approaching $30bn over the next three years. These include the $11bn Qatargas II project (advised by Royal Bank of Scotland), the $11bn RasGas II project, and the Qatargas III project (advised by Société Générale).

Besides the vast assortment of oil and gas-related infrastructure projects, there are major efforts in the Qr1.5bn ($410m) Hamad Medical City project, the $700m construction project for the 2006 Asian Games in Doha and the 10 new luxury hotel complexes due to be completed by 2006. This huge financing need has led to innovative methods and observers believe that Qatar will continue to use as diverse a range of financing options to establish new markets and better pricing.

One interesting new structure last October was the $700m Qatar Global Sukuk, led by HSBC Bank and Qatar International Islamic Bank. This was the first Islamic financing done for the state of Qatar and proved very successful, attracting $1.2bn in offers and forcing the deal size to be raised from $500m to $700m.

Domestic scene

While international and regional players view the market favourably the biggest domestic institution remains Qatar National Bank (QNB), which has the largest local network of 34 branches supported by 68 ATMs. QNB also has the broadest international network, with branches in London and Paris. Owned 50% by the government and 50% by private sector shareholders, QNB accounts for 52.7% of Qatari bank assets (45.7% of total bank assets including foreign banks).

In 2003, QNB continued to perform well with net profits up 10.5% to Qr641.1m, providing an improved return on average shareholders’ equity from 14.0% in 2002 to 15.1% in 2003. The bank claims an impressive cost/income ratio of 26.5%, making it among the most efficient banks in the GCC region. Its size, almost four times as large as its nearest local competitor in asset terms, gives it a dominant position. Chief executive Saeed Al Misnad proudly refers to QNB’s role in lead managing three successful initial public offerings (IPOs) for Industries Qatar, Qatar Meat and Livestock Trading, and Gulf Storage for a total of Qr2.8bn.

With 45.5% of all customer deposits, QNB is in a strong position in both corporate and retail areas and is considering establishing a presence elsewhere in the Gulf. Also, according to Mohamed Moabi, head of economics and planning at the bank, net profits for the first quarter of 2004 are up 14.5% year-on-year with another strong performance expected.

Competing for the crown

Qatar is highly competitive and a number of banks are fighting hard for market share and QNB’s crown. Doha Bank, the second largest in asset terms, produced the highest growth in profits of all the banks in 2003, with net profits rising by 77.4% to Qr 215m. And the growth does not stop there: Fahad bin Mohamed bin Jabor Al-Thani, chairman of Doha Bank, believes the economic boom in Qatar is enormous and he is expanding operations aggressively both at home and abroad. He is enthusiastic about the prospects for the economy and notes the 81 high-rise towers that are under construction in the West Bay area, the capital’s new city centre.

Doha Bank, which celebrated its 25th anniversary last month, has a number of ambitious plans to expand its market share and balance sheet, which has already grown by almost 40% in the past two years. On May 27, the bank was due to open a new representative office in Dubai, the first Qatari bank with a presence in Dubai. New acting general manager

R Seetharaman believes the predominantly trade finance office will strengthen the strong cross-border trade links between Qatar and Dubai and will reinforce Doha Bank’s trading and banking capabilities of its New York branch. The bank is the only one in Qatar with a New York branch, which is useful in attracting regional clients from Yemen and the Gulf.

In another strategic move, Doha has formed an alliance with Bahrain-based United Gulf Bank (UGB) to bring the latter’s project and corporate finance advisory skills to Qatar. Mr Seetharaman sees this as an important part of building Doha’s corporate finance capabilities; Doha is understood to have completed more IPOs than any other bank and is keen to expand in syndications and related activities.

Good growth

Comercialbank, the second largest in terms shareholders’ equity, has improved earnings significantly in recent years, posting net profits of Qr248m in 2003, which represents a sizeable 56.2% increase over 2002. Net profits also grew by 57.1% in 2002, demonstrating the bank’s expansion in the past two years. The key development for the bank in 2003 was not only the 42.5% rise in total assets to Qr 8.9bn but also the 79.3% growth in shareholders’ equity to Qr1.4bn; this reflected a 50% increase in paid up capital through a rights issue of one share for every five held at a price of Qr60 per share.

Comercialbank’s expansion can also be seen in its dramatic growth both in loans and customer deposits. Loans increased 38.1% and customer deposits shot up by 42.9% to Qr6.2bn, representing higher growth than most banks. Besides undergoing a rebranding exercise, Comercialbank introduced a specific banking solution for non-resident Indians (NRIs), called nriDirect, in conjunction with India’s second largest bank, ICICI Bank. Given that out of Qatar’s population of 743,000 in the latest 2004 census, about 550,000 are non-Qatari and largely from the Indian sub-continent, the importance of good relationships such as that with ICICI Bank cannot be underestimated.

Islamic players

The two Islamic banks, Qatar Islamic Bank and Qatar International Islamic Bank (QIIB), are both benefiting from the economic boom and net profits rose by 43.7% and 27.3% respectively in 2003. Abdulbasit Al-Shaibei, general manager of QIIB, acknowledges the abundance of projects but also notes that his bank is too small to participate in the big government projects.

Nevertheless, Mr Al-Shaibei says that QIIB played a lead role in the $700m Qatar Global Sukuk with HSBC and believes that Islamic Sukuk financing will be used in project finance and will be expanded into other areas. He insists that Islamic banking has changed significantly and is now more liberal. “Islamic scholars today have to come up with solutions, the challenge [in doing business] is to say yes but with particular terms and conditions,” he says. Both banks continue to expand, with shareholders’ equity in the two rising by around 28% in 2003. Mr Al-Shaibei says there are no plans to merge and both banks compete fiercely against all other banks.

Foreign banks

Along with Al Ahli Bank of Qatar and Grindlays Qatar Bank (see box on previous page) the other participants in the market are the seven foreign banks. In 2002, net profits reached Qr173.3m, 13.5% of the overall total. Estimates suggest that this will increase beyond 15% in 2003, with HSBC leading the charge with profits of Qr120m.

The bigger banks, such as HSBC and Standard Chartered, which have been in Doha for decades, are active in project finance and in all wholesale and retail areas. Kevin Smorthwaite, HSBC’s chief executive in the country, says: “Qatar attracts the highest attention from the very highest levels of HSBC’s senior management and they are trying to bring a diverse range of commercial and investment banking services, too.”

Although foreign bankers see the huge opportunities in infrastructure and the government’s ambitious plans, in population terms, Qatar is a small market and, although retail banking is attractive, it is limited. Nevertheless, bankers can hardly contain their enthusiasm. As one notes: “Qatar represents an embarrassment of riches but there is potential for indigestion if not managed efficiently.”


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