The Qatari banking sector has held up well over the past few years, and is now hoping to benefit from renewed economic activity, an influx of tourists drawn to the country by the 2022 Fifa World Cup and increased revenue flowing into the country thanks to strong demand for natural gas. There is now considerable optimism in the sector.
“Qatar was one of the least affected countries in the world by the economic effects of the Covid-19 pandemic,” says Abdulla Mubarak Al-Khalifa, group CEO of Qatar National Bank (QNB), the country’s largest bank.
“As a result, the economic recovery is in full force while the banking sector remains resilient and healthy, presenting significant growth, ample liquidity, adequate levels of capitalisation, high asset quality and robust profitability,” he adds. Total assets for the sector grew by 8.6% in 2021, while loans and deposits were up 7.7% and 7.6%, respectively.
Strong fundamentals
Those working in the Qatari banking sector see strong fundamentals in place, with the sector benefiting from a return to economic normalcy following two years of Covid-related uncertainty.
“Operating conditions for the banks are improving as the economy is rebounding strongly after the challenges of the pandemic abated, further supported by rising oil prices,” says Gudni Stiholt Adalsteinsson, acting CEO of Doha Bank, one of Qatar’s largest private sector banks. Qatar’s economy is expected to expand by around 3.9% this year, according to the International Monetary Fund.
Mr Adalsteinsson says that economic activity in the non-oil sector in Qatar also continues to grow “as tourism has really taken off with the World Cup around the corner. This is, of course, key for the banking sector, as most of our business is in the non-oil related sectors,” he adds.
At the same time, the cost-to-income ratio of listed Qatari banks has dropped steadily over the past two years, from a high of 33.4% in the first quarter of 2020 to 28.7% in the last quarter of 2021, according to Kamco Invest, a regional non-banking financial powerhouse.
Customer deposits among the country’s seven listed banks reached $385.3bn in the fourth quarter of 2021, up from $364.6bn during the same period of 2020 and $342.3bn in the fourth quarter of 2019, with total assets hitting $504.6bn in 2021, according to Kamco Invest, with Islamic banking assets reaching $118bn.
Profitability for the Gulf Co-operation Council (GCC) region banking sector as a whole, meanwhile, hit one of its highest yearly levels in 2021, up by 40% to $35bn. Qatari banks experienced the smallest increase, of 7.7% year-on-year compared to 52.6% for UAE banks and 40.2% for Saudi lenders.
Yet the country’s listed banks boasted the highest average return on equity in the region, of 12% at the end of the fourth quarter of 2021, higher than the GCC average of 10%.
Downgraded banks
Qatar’s banks have long been able to rely on the financial support of the state, which in the past has pumped money into the sector when necessary.
Qatari authorities injected an estimated $40bn into the banking sector in 2017, following the economic and political embargo placed on the country by Saudi Arabia, the UAE, Bahrain and Egypt, and several Qatari banks received capital injections between 2009 and 2011 to enhance their capital buffers, with the government also purchasing problem assets from banks.
There is still a strong sense that this implicit support remains in place. Even so, in April 2022, Fitch Ratings downgraded seven Qatari banks’ long-term issuer default ratings, reflecting the banking sector’s increased reliance on external funding and rapid asset growth.
In announcing its downgrade, Fitch said it believed this reliance on foreign funding had weakened the sovereign’s ability to provide support to the system “in case of need”. The downgraded banks were all key players in Qatar: QNB, Qatar Islamic Bank (QIB), Doha Bank, Commercial Bank of Qatar, Qatar International Islamic Bank, Ahli Bank and Dukhan Bank.
According to Fitch, non-resident funding reached $196bn, or 47% of the Qatari banking sector’s liabilities, at end-2021, up from $121bn, or 38%, at end-2018. Meanwhile, the banking sector’s net external debt increased to $131bn, 81% of Qatar’s 2021 gross domestic product (GDP), up from just 31% at the end of 2018.
In April, Moody’s Investors Service pointed to the fact that Qatari banks have increasingly turned to foreign sources of funding to meet the demand for loans for projects related to the 2022 Fifa World Cup and economic diversification. This makes them “vulnerable to potential falls in investor confidence, and that could lead to rapid withdrawals and raise systemic risks”.
Over the past four years, credit growth in Qatar had averaged 9% a year, it said, against a flat rise in residential deposits, with foreign liabilities at Qatari banks increasing to a high of 39% at the end of 2021 as part of efforts to bridge this funding gap.
The banking sector’s net foreign liabilities hit $128bn at end-2021, roughly 71% of nominal GDP, up from 21% of GDP at the end of 2017.
Confidence in the sector
While those in the banking sector say that they understand the concern, and Fitch’s move to downgrade the banks, they do not agree that there is anything to be overly worried about.
“Qatar is a growing economy, which means that foreign funds are needed [for] growth,” says Doha Bank’s Mr Adalsteinsson. “This holds true for most open economies which are in an expansion phase.
“While I don’t agree with their rating action, as foreign funding can give a valuable degree of diversification and cost effectiveness, it is important to ensure that foreign funding is only taken from stable sources with longer tenures to avoid any risk events,” he adds. “This is exactly what we have been doing at Doha Bank by replacing short-dated funding with longer dated bond issuance.”
Others agree with this approach. “This issue of gross foreign liabilities has been highlighted in earlier reports by rating agencies, and QNB has continued to take action to reduce reliance on non-resident funding by extensively diversifying funding by source, currency, tenor and geography. QNB does not expect any material impact on its business,” notes Mr Al-Khalifa.
New faces
There have been some notable changes in the Qatari banking sector over the past year. Raghavan Seetharaman stepped down as chief executive of Doha Bank in March, after 15 years at the helm, with Mr Adalsteinsson stepping in as acting CEO. Meanwhile, Bandar bin Mohamed bin Saud Al-Thani was appointed as the new governor of the Qatar Central Bank in November, replacing Sheikh Abdulla Bin Saoud Al-Thani.
The new governor previously served as president of the state audit bureau, and it is unclear how his appointment will affect the overall approach the central bank has taken in recent years.
“The previous governor provided stability for the banking system and the broader economy during an extended period that witnessed rapid growth, external economic shocks and geopolitical volatility,” says Tarik Yousef, a non-resident senior fellow at the Brookings Institution, based in Doha.
“However, over time, the Central Bank of Qatar became conservative, and the financial system fell behind regional peers in the areas of innovation and technological change,” he adds. “It is uncertain how the new governor plans to evolve the regulatory framework to transform financial services and facilitate the deepening of fintech development.”
The Qatari banking sector is also still dealing with the fallout from the arrest of finance minister Ali Sherif Al-Emadi in May 2021, as part of an investigation into alleged misuse of public funds and abuse of power.
Mr Al-Emadi had been an influential figure in the banking sector in Qatar for many years, overseeing the growth of QNB and then serving as finance minister since 2013. He also sat on the board of Qatar’s $400bn sovereign wealth fund, the Qatar Investment Authority.
“Al-Emadi’s arrest was striking, and many thought it might be the beginning of a series of changes, from a crackdown on malfeasance in the public sector to broader governance reforms,” says Mr Yousef. “It is uncertain now — especially that fiscal pressures related to oil and gas prices have disappeared — whether the political will to move forward remains.”
Merger momentum
Qatar is not exactly known for bank mergers, but two major deals have taken place in recent years. In 2019, Barwa Bank merged with International Bank of Qatar to form a bank with total assets valued at more than QR80bn ($22bn). The bank was subsequently renamed Dukhan Bank, taking its name from the site of the first substantial oil reserve discovered in Qatar.
Meanwhile, in November 2021 Masraf Al Rayan and Al Khaliji Commercial Bank announced the completion of their own merger, with the integration of products and services expected to be completed this year. The combined bank, operating under the Masraf Al Rayan name, has more than QR182bn in total assets, making it one of the largest sharia-compliant banks in the world.
“While our immediate focus is on the operational integration of both banks into one seamless platform, our medium-term plans are ambitious,” Al Rayan Group’s CEO, Fahad Bin Abdulla Al-Khalifa said after the bank released its 2021 consolidated financial statement. Mr Al-Khalifa pointed in particular to enhancing customer experience through areas like technology, and strengthening the links between the bank’s operations in Qatar and those in the UAE, France and the UK.
While there is a sense that further mergers in the Qatari banking sector could be beneficial, with the sector having long been considered ripe for consolidation, those who watch the sector believe we are unlikely to see any more mergers in the near future.
“Bankers I have talked to think that the mergers that have taken place over the past few years have completed the process,” says Mr Yousef. “This is particularly the case as oil and gas prices have strongly rebounded, increasing profitability for the remaining banks.”
Sharia and digital future
Masraf Al Rayan and Al Khaliji Commercial Bank’s merger has increased competition in the Qatari Islamic banking sector, where sharia-compliant assets already account for 28% of local banking sector assets, 32% of deposits, and are growing faster than the conventional banking sector.
“The prospects for Islamic banks remain very positive as they are enlarging their customer base and appealing more to customers who have not been previously inclined to use sharia-compliant products and services,” says Bassel Gamal, group CEO of QIB. Mr Gamal adds that increased competition is challenging all market players to strive to provide better customer experience and become more efficient, “which will benefit all stakeholders in the long-run”.
At the same time, all major Qatari banks are investing heavily in digital offerings, in a bid to remain competitive.
“I expect the implementation of digital technology across operations and the accelerated transition to digital banking necessitated by Covid-19 to continue,” says Joseph Abraham, group CEO of Commercial Bank of Qatar.
Mr Abraham highlights the fact that banks are also needing to redouble their efforts to protect themselves against cyber-attacks and their customers from fraud. “Credit risk also remains fundamental for banks,” he adds, though Qatari banks remain well capitalised “with the sector capital adequacy ratio of 19% — well above required international standards”.
Looking abroad
Many Qatari banks are also targeting growth outside of their home market. QNB has recently expanded its presence internationally by opening a branch in Hong Kong and re-launched operations in Saudi Arabia, following the end of the embargo.
“Domestically, we are the largest bank in Qatar and our aim is to maintain our leading position. On the other hand, international expansion will continue to be one of our strategic growth drivers,” explains Mr Al-Khalifa.
Others, meanwhile, point to growth opportunities in areas like sustainable lending. “There is opportunity in the sustainable segment, which is reflected in the activity in the region,” says Doha Bank’s Mr Adalsteinsson, who points out that green and sustainability-linked debt issuance in the Middle East and north Africa region more than quadrupled, jumping from $4.5bn in 2020 to $18.64bn in 2021. “I think many underestimate the amount of green lending and energy efficient projects and buildings that are taking place in Qatar,” he adds.
What is clear is that for many banks operating in Qatar, the pandemic is now well and truly behind them.
