Stability Through Prudence


Qatar's banks have proven resilient to the challenges of weak oil prices and, widening their overseas footprint, have continued to shift toward fuller compliance with international standards.

While recent ructions prompted S&P Global Ratings to put certain Qatari banks on Credit Watch, the agency has nonetheless labelled the Qatari authorities, “highly supportive toward the banking system,” anticipating government cushioning should the need arise. Short-term financial risk stems from oil price volatility given current divergence from prices projected in the Qatar National Vision 2030 (QNV2030), built on large-scale infrastructure realization. Deflated hydrocarbon output has dented economic growth, which has averaged 3.9% per year since 2012, in stark contrast to 16% between 2007 and 2010.

Looking Abroad

In mid-June of this year, the Governor of the Qatar Central Bank (QCB), HE Sheikh Abdullah bin Saoud Al-Thani, described the local banking sector as fully functional, with no disruption to either local or international transactions. He underlined robust sector liquidity, underpinned by Qatari banks’ wide international footprint across Asia and Europe, which ensured competitive flexibility. Reliance on external borrowing was estimated at 80% of GDP (excluding the banks) for 2016. BNP Paribas notes that Qatari banks’ net external position is negative at almost 30% of GDP, from a slender 3.9% in 2014. The conclusion is that Qatar’s continued ability to access external financing is crucial.
Gulf oil exporters have been turning to the bond market to plug budget shortfalls, which according to the IMF could reach USD900 billion by 2021. In May 2016, the nation had realized the Middle East’s largest-ever bond sale of USD9 billion, to contend with its 4.9% economic deficit. Then, in September QCB raised USD1.26 billion from a mixed bag of conventional and Islamic bonds with maturities of three, five, seven, and 10 years. Finance Minister Ali Sherif Al-Emadi revealed in February 2017, however, that due to the relative recovery in oil prices, Qatar may not realize an international bond this year.

Here Today, and Tomorrow

Sustainability is a byword of the financial universe, in support of which the QCB has fine-tuned implementation of the Basel III framework being phased in since January 2014; this in tandem with its macro-prudential policies. To foster funding stability and a better grasp of related risk, in March 2015 QCB commenced the phased implementation of a net stable funding ratio (NSFR). Duly, banks were advised to keep the NSFR at a minimum of 70% by end-2015 and increase it by 10% annually to 100% by 2018. Similarly, as per the requirements of phased implementation of the liquidity coverage ratio (LCR) since 2014, banks had to maintain an LCR of 70% in 2015 and must reach the 100% target by 2018. The implementation of these measures in a phased manner is in step with the graduated approach envisioned by the Basel III framework.

Firm Rankings

The World Economic Forum’s 2016-2017 Global Competitiveness Report places Qatar high in the rankings. Accordingly, the nation is 21st for financial market development, 18th for financial services meeting business needs, and ninth for the affordability of said services. Meanwhile, financing through the local equity market also places the nation ninth, with second place for ease of access to loans and first for venture capital availability. Qatar ranks 20th for the soundness of its banks.

Data Mining

Commencing in 2010, QCB has been publishing an annual overview of the financial sector. The latest perusal, for 2015, reveals that in addition to corporate governance amendments in July, the Financial Stability and Risk Control Committee has been championing regulatory co-ordination among sector regulators for better treatment of systemic risk. Government policy in support of diversification found the banks dependent on public sector credit demand during oil’s boom years, where major infrastructure supported economic diversification. Yet, that demand has since shifted to the private sphere, confirming its competitive role in diversification. Public sector credit witnessed moderate growth in 2015 of 4.7%, having shrunk 6.2% a year earlier. In contrast, private sector credit soared 6.5% from 5.96% growth in 2014. Despite the economic growth curbing effect of weak oil prices, Qatar’s banking sector grew 7.6% in 2015, strongly outperforming overall GDP growth of 3.6%. The top three players accounted for roughly two-thirds of total banking assets. QCB data also indicate that the asset component of the banking sector remained dominated by credit, at around 70% of total assets, while deposits comprise under 60% of liabilities. And regarding profitability, sector growth in net income of 2.5% fell heavily YoY in 2015 from 7.7%. Duly, the return on average asset (ROAA) slipped to 1.9% from 2% a year earlier.

And More Recently

By official numbers, Qatar’s central bank balance sheet rose to QAR189.72 billion MoM in April 2017 from QAR188.26 billion, having averaged at QAR38.63 billion since 1982 and peaking historically at QAR232.663 billion in November 2014. Qatar’s M0 money supply, the most liquid gauge of money supply, rose to QAR63.5 billion in April from QAR60.48 billion, while M1 money supply declined to QAR133.49 billion from QAR134.85 billion. Finally, M2 money supply, encompassing M1 and short-term time deposits in banks, rose MoM to QAR525.16 billion in April from QAR518.3 billion in March. Meanwhile, turning to the banks themselves, local lenders’ balance sheet climbed MoM to QAR1,308 billion in April 2017 from QAR1,282 billion. On the credit front, the value of loans rose 9.30% in April 2017 over the same month in the previous year, with growth having averaged at 16.6% since 1983, and peaking at 75.6% in April 1992 and troughed 14.9% in July of 1984. Qatar’s deposit interest rate had risen to 2.4% in 2016 from 1.6% in 2015. In March of this year, QCB raised the overnight lending rate by 25bp to 5%, following a similar margin of tightening from the US Federal Reserve. QCB simultaneously raised in its overnight deposit rate by 25bp to 1.25%. And amid commercial banks’ tight liquidity concerns, the QCB reduced banks’ required reserve ratio from 4.75% to 4.5%, effective April 1. Data for a month later reveals a decline in private sector credit to QAR454.52 billion from March’s QAR454.69 billion.

Thinning the Field

With the presence of 17 banks making for a crowded arena in the new era of low oil revenues, consolidation becomes a viable consideration for financial entities. An unfruitful attempt at banking consolidation in Qatar in 2011 had resulted in failed talks between IBQ and Al Khaliji Commercial Bank. Notable consolidation was realized elsewhere in 2016 with the merger of Abu Dhabi’s National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC, resulting in a USD175-billion asset giant. Mergers, in fact, are a pertinent option in other economic sectors, a notable success being the rationalization motivated union of Qatar’s gas companies QatarGas and RasGas.

The big banking story today, though, is the prospective three-way merger of local banks Masraf Al Rayan, in which sovereign wealth fund Qatar Investment Authority holds a 15.7% stake, Barwa Bank, and International Bank of Qatar, the former two being sharia-compliant institutions. The move, said to take around six months as of April 2017, would create a behemoth, namely the biggest sharia-compliant bank in Qatar and third largest in the Middle East on assets in excess of USD44 billion.

Sharia compliance

Islamic banking, the global assets of which the World Bank estimates to have grown by an annual average rate of 10-12% to exceed USD2 trillion, is reportedly outgrowing conventional banking across the Islamic world. QCB data indicate that among GCC member states, by 2Q2015, Islamic banking assets had reached USD490 billion. Qatar has legislated to facilitate its evolution. Asset growth of Qatar’s Islamic banks was an impressive 15.3% for the year. This in part reflected the 2011 regulation terminating all Islamic windows in conventional banks by December of that year. Furthermore, to shore up capital strength, QCB had commenced implementation of IFSB Standards on Capital Adequacy for Islamic banks as of January 2014. According to Masraf Al Rayan Group CEO Adel Mustafawi, the bank enjoyed, “a good share of Islamic banking operations in the UK.” Its 2014 acquisition of Al Rayan Bank expanded it six fold. And with roughly 85-90% of the bank’s clients being UK citizens, “Most of the group’s growth is now coming from our UK operations, as we have customers from European countries that are interested in our services in London.”
Giant case study

It is telling that even with the above-mentioned prospective merger, the new entity would remain dwarfed by Qatar National Bank (QNB), the biggest player in the Middle East, with a reported market value of USD36 billion and assets of close to USD200 billion. Its USD3.4 billion net profit for 2016 marked a historic high. And as of end-March 2017, QNB’s capital adequacy ratio of 15.7% compared well with the QCB stipulated minimum of 14.8%. 50% owned by the Qatar Investment Authority, its footprint spans 30 countries, among which are Egypt, the UAE, and a number of African nations. In Turkey, QNB purchased the fifth-largest private lender, Finansbank. Industry data report that 56% of its funding and 49% of its deposits derive from abroad. Group CEO Ali Ahmed Al-Kuwari gave TBY a broad brushstroke outline of the bank’s contribution to national projects. “Qatar is witnessing a strong investment drive to diversify its economy, and hosting the FIFA World Cup in 2022 provides a key milestone toward that end.” Accordingly, “QNB has focused its financing on four key areas: utilities, transport, real estate, and the FIFA World Cup infrastructure.” Reflective of the bank’s longer view, he notes that Middle East, Africa, and Asia (MEASEA) markets will remain the focal point of global growth since, “These regions require further trade and investment flows to support the building of the foundations for socio-economic developments, such as infrastructure, including transport, real estate, power, telecoms, healthcare, education, and tourism.” And, as this will “drive population growth, consumer demand, and consumption, resulting in higher economic growth across the region (by) strategically positioning our business toward and across these markets, we are securing our vision of becoming a leading bank in MEASEA by 2020.”

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