STATE SUPPORT, PRUDENT REGULATION
Glancing back some years one notes that many banking institutions in the GCC not reliant on foreign capital were unscathed by the 2008-2009 credit crunch. Those Qatari banks that were, enjoyed government cushioning, with unwelcome real estate loans and equity portfolios bought up. As a result, as of end-2012 non-performing loans (NPLs) were at a minuscule 1.7% of total loans. And while Basel III norms stipulate a minimum Capital Adequacy Ratio (CAR) of 12%, Qatari banks had jumped the gun at 18.9% at end-December 2012. Furthermore, the Qatari Central Bank (QCB) in 2013 decreased local banks’ domestic and overseas financial investments from 30% to 25% of capital and reserves, curbing investments abroad to 15% of total securities. This increased local bank investment in the government debt market, thus maintaining local financial sector health in light of massive infrastructure projects valued at $150 billion for the next decade. According to Qatar National Bank, “Banking assets are projected to grow by 11% in 2015, driven by an increase in loans to finance Qatar’s large public and private projects currently underway.” In mid-2014 ratings agency Moody’s maintained its stable outlook for Qatar’s banking system, as it had done since 2010. The outlook reflects confidence that Qatar’s robust economy is more than able to sustain the banking sector’s strong earnings, capital adequacy and easily manageable volume of non-performing loans (NPLs). Its caveats included a warning against excessive dependence on hydrocarbons, and more efforts to develop a still nascent corporate-governance and risk-management practices.
Moody’s Banking System Outlook: Qatar report forecast real GDP growth of 6% for 2014 propelled by the ever-important factor of public spending. For 2014, public spending on infrastructure, in itself a major account in the banking sector, manifested in growth of 11% for the non-hydrocarbon sector, leading to domestic credit growth of 15%-20%. Encouragingly, Moody’s forecast banking system NPLs remaining at around 1.5%-2% of gross loans over the next 12-18 months, thanks to a dynamic operating environment, regulatory prudence and government-related loans at a whopping 42% of the sector’s total loan book. Moody’s highlighted, though, that asset quality remained vulnerable to event risk due to high borrower concentration and limited transparency among local conglomerates. Meanwhile, given the banking sector’s sustained balance sheet growth, Moody’s foresees healthy capital levels prevailing, “with system’s Tier 1 capital ratio in the 14%-16% range over the outlook horizon…” with capitalization metrics sufficient to absorb losses under Moody’s low probability adverse scenario.
Leading Qatari banks rated by S&P financially outperformed their rated GCC peer group in 2014, largely due to Qatar’s conducive operating environment and retain two-thirds of the banking system’s overall assets. Meanwhile, rating agency S&P forecasts annual lending growth of around 10%-15% for some years to come, and 5% GDP growth for both 2014 and 2015. Yet in the highly concentrated banking landscape the big five banks currently represent almost 80% of total assets, while foreign banks retain a 5% stake. The top 20 loans at year-end 2013 accounted for roughly 45% of total loans on average. This, in theory at least, renders the system susceptible to the default of major names and real estate market fluctuations. Mitigating this risk, however, is the government’s track record in safeguarding the financial strength of banks and government-related entities (GREs). According to official data, banks’ real estate exposure as of March 31, 2014 was huge, with total real estate-related loans on average at about 20% of the system’s total loans (including 5% of real estate exposure to GREs).
The latest QNB banking sector data as of November 2014 shows October’s loan book down by 2.0% MoM (up 7.9% YTD), with deposits down by 0.3% MoM (+8.0% YTD). The public sector (down 5.7% MoM in October) was the key factor in the overall loan book decline (public sector loans were up 3.9% MoM in September). Moreover, deposits also shed a slender 0.3% MoM (deposits climbed 1.9% MoM in September). Thus, the loans to deposit ratio (LDR) slipped to 105%, compared with 107% in September. The bank foresees public sector improvement, and substantial growth in corporate loans followed, along with SME and consumer lending to be the primary engines of the overall loan book in 2015, as in 2014. It based its forecast on the rise in project activations going forward. For October 2014, public sector deposits decreased by 3.3% MoM (+6.3% YTD 2014) for the month of October 2014. By individual component, government institutions (accounting for roughly 57% of public sector deposits) rose 0.5% MoM (+11.4% YTD 2014). Additionally, the semi-government institution component climbed 10.1% MoM (up 0.1% YTD 2014). This said, the government segment shed 15.4% MoM (+0.3% YTD). And on the other hand, private sector deposits climbed 1% MoM (+9.1% YTD 2014). Private sector companies & institutions rose 1.0% MoM (+8.1% YTD 2014), while the consumer component rose 1.1% MoM (up 10.1% YTD). The banking sector’s overall loan book lost 2% MoM in October, in contrast with a 4.0% MoM appreciation in September 2014. Total domestic public sector loans lost 5.7% MoM (down 5.7% YTD). The government segment’s loan book also 16.8% MoM (yet up 1.6% YTD 2014). Furthermore, the government institution component (accounting for ~59% of public sector loans) shed 1.5% MoM and 11.8% YTD. Furthermore, the semi-government institution loss of 0.5% MoM (+11.4% YTD) ensured that all three public sector components dragged the overall loan book down for October 2014. Private sector loans appreciated 0.3% MoM and 13.8% YTD, where Consumption & Others (accounting for ~30% of private sector loans) climbed 0.9% MoM (+16.9% YTD). The vibrant Real Estate component (accounting for ~27% of private sector loans) climbed 2.1% MoM (+5.7% YTD).
In contrast, the Services component lost 7.2% MoM, but remained in the black by 11.8% as of October. The best private sector performers of the period were General Trade (+27.1% YTD) and Contractors (+23.0%YTD), while Industry posted a flat YTD print.
LOOKING FURTHER AFIELD
Local Qatari banks successfully leverage their financial fortitude abroad to diversify risk. Predictably perhaps, populous emerging markets like Turkey (80.7 million) and Egypt (84.5 million) have proven of interest. Qatar National Bank (QNB), a force in 26 countries, aims for international business to generate roughly 40% of profit and 45% of total assets by 2017. In 2013 it purchased National Société Générale Bank (NSGB) in Egypt and has also extended its footprint by opening representational offices in India and China. The semi state-owned bank posted a year on year provisions rise of 90% following the Egyptian foray. The Commercial Bank of Qatar holds a 70.84% stake in Alternatifbank (ABank) in Turkey, with an estimated annual return on equity of around 15%. Doha Bank boasts representative offices and branches that span Kuwait, Dubai, and Abu Dhabi, as well as Japan, China, Singapore, South Korea, Australia, Turkey, the UK, and Canada. Further target markets beyond the GCC include Hong Kong, and the vast potential market of India.
THE BIG FIVE
Qatar’s concentrated playing field sees the big five banks representing close to 80% of total assets, while foreign banks hold onto a 5% stake. QNB, 50 years old in 2014, and the Gulf Arab region’s largest lender, rules the roost on total assets of $133.5 billion for 2014 up from $121.7 billion in 2013, holding close to 50% of total sector assets. QNB reported a 5.5% rise in 4Q2014 net profit at $686.7 million, while full-year net profit was at 10.5 billion riyals, up 10.3% YoY. Its capital adequacy ratio for 2014 was at 16.2%, up from 15.6% in 2013. QNB proved its global scale when the 2012 Bloomberg Markets survey named it “The Strongest Bank” in the world. The next largest institution is Commercial Bank of Qatar, which has assets of some QAR114 billion. Following on from QNB in descending order in terms of share of total banking assets are Commercial Bank with just 10.2%, Qatar Islamic Bank with 8.2%, Masraf Al Rayan at 7.4%, and Doha Bank with 6.8%.
Ernst & Young’s (EY’s) World Islamic Banking Competitiveness Report 2013-14, The Transition Begins, forecasts Islamic banking assets at commercial banks growing at a Compound Annual Growth Rate (CAGR) of 19.7% over 2013-18 across the QISMUT countries (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey) to reach $1.6 trillion by 2018 (from $567 billion in 2012). Globally, Islamic banking assets are forecast to rise “to $3.4 trillion by 2018 assuming economic stability in Islamic finance markets; capacity and capability building at larger Islamic banks to transition to the next phase of development; and connectivity across high-growth markets and sectors,” the report states.
The Qatari Central Bank (QCB) prohibited conventional banks from opening Islamic windows, with local players providing the service since 2005. Today, the four fully-fledged sharia-compliant banks are Qatar Islamic Bank Group, Masraf Al Rayan, Qatar International Islamic Bank, and Barwa Bank. The EY report reveals Qatar’s Islamic assets as of 2012 at $54 billion, with a 24% share of the total assets of the QISMUT group. It forecasts these banks sustaining a 20%+ medium-term growth trajectory.
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