State Spending Boosts Qatari Banking Sector

Qatar’s banking sector is not entirely without risks, but most observers seem confident of strong growth in the years ahead Published in Bloomberg Businessweek, 21 December 2014

The assets of the Qatari banking system passed the QR1 trillion ($275 billion) threshold this year, in another sign of the continued healthy growth of the sector.

According to data compiled by Qatar National Bank (QNB), the country’s oldest and largest bank, the sector’s assets grew by a compound annual rate of 18.1 per cent from 2009 to 2013. Deposits over that time grew by 22.1 per cent, loans by 20.8 per cent, and profits by 12.5 per cent.

Adding to the sense of positive momentum, the loan-to-deposit ratio has been falling, from 111 per cent in 2011 and 2012 to 105 per cent in 2013, and non-performing loans accounted for just 1.9 per cent of all loans at the end of last year.

“The banking sector continues to grow at a double-digit rate on the strength of Qatar’s rapid economic growth and large investment spending,” says Joannes Mongardini, head of economics at QNB Group. “Banking assets are projected to grow by 11 per cent in 2015, driven by an increase in loans to finance Qatar’s large public and private projects currently underway.”

Given all that it is unsurprising that the IMF characterised the local banking sector as “well capitalised, liquid, and profitable” in its latest annual review of the Qatari economy in May 2014. Others in the region echo that positive assessment.

“The overall performance of Qatari banks’ remains solid. Strong public spending continues to support the operating environment and drive credit growth, which is expected to be among the highest in the GCC for 2014,” says Nitish Bhojnagarwala, a Dubai-based analyst for credit ratings agency Moody’s Investors Service. “The banks’ financial metrics remain robust. Strong earnings and sound capital and liquidity buffers position them well to benefit from the economic activity driven by large government spending.”

However, while the market is healthy, it is also rather unbalanced in some respects. QNB is responsible for close to half of all assets, with QR475 billion at 30 September this year. The next largest institution is Commercial Bank of Qatar, which has assets of some QR114 billion – less than a quarter of the size of the market leader.

Both of these banks are conventional lenders, but some Shariah-compliant banks are also fairly sizeable. The biggest is Qatar Islamic Bank which has a network of 32 branches and some QR93.3 billion in assets, followed by Masraf al-Rayan, with a far smaller branch network of 10 outlets but QR77.8 billion in assets.

One of the key factors behind the positive performance of the banking sector is the ongoing high levels of government spending, which are underpinning growth in the local economy and helping to ensure that all Qatari banks are making healthy profits these days.

“The Qatari banking sector is well placed to take advantage of the swathe of financing opportunities associated with the government’s ongoing investment drive,” says Tom Simmons, an economist at Saudi Arabia’s Samba Bank. “This is already evident in a pick-up we’ve seen in lending to contractors, which was running at 42 per cent in the 12 months to September, though from a small base. To this end we see credit growth remaining comfortably in double figures through to 2017.”

For all the good news, there are a few clouds on the horizon. Jason Tuvey, an economist at London-based Capital Economics, notes that credit growth has been rising rapidly in recent years, with the credit-to-GDP ratio up by almost 35 percentage points in the past seven years.

“Historically, increases in the credit-to-GDP ratio of 3 percentage points or more in a year have been a good predictor of future financial stress,” he said in a research note published in July. “To be clear, we don’t envisage a crisis in Qatar’s banking sector. And even if there was one, the government’s healthy balance sheet means it would be able to bail the banks out. But it does look like loans may start to sour in greater numbers, which could cause credit conditions to tighten.”

An underlying problem is that, in common with many other countries in the region, deposits and loans are often heavily concentrated around a small number of large customers, not least the government. The nature of the local economy means that banks can easily end up with high levels of exposure to a few key sectors, particularly real estate and construction.

“The major challenge for Qatari banks is certainly real estate prices,” says Eric Dupont, senior manager at Fitch Ratings, another credit ratings agency. “These have been rising rapidly recently despite an over-supply in the amount of office space. At the same time, the contracting sector has been weakening owing to payment delays by the government. Another challenge is continued pressure on margins due to aggressive competition.”

That high level of competition is encouraging some Qatari banks to look abroad for growth, with Turkey, India and parts of Africa among the markets on their radars. QNB is again the most active in this area, with a presence in 22 other countries. In 2013, it bought 97 per cent of National Société Générale Bank in Egypt, opened a representative office in China and a subsidiary in India.

It was not the only one making international moves that year, however. In March 2013, Commercial Bank of Qatar acquired a 71 per cent holding in Alternatifbank in Turkey. And in July 2013, Qatar Islamic Bank opened its first fully-owned overseas branch, in Khartoum, Sudan.

Even as this international expansion is continuing, some international investors have decided that they have had enough of the Qatari market. Earlier this year, National Bank of Kuwait (NBK) agreed to sell its 30 per cent stake in International Bank of Qatar to a group of Qatari investors for $538 million, generating a profit of $87 million for the Kuwaiti institution. NBK said it had made the decision due to the limited potential to increase its holding in the business to a controlling stake, which is its preferred investment strategy these days.

While NBK might have lost interest in the market, most others continue to look at Qatar’s banking sector as one with high growth potential. The enthusiasm of the government to spend heavily to upgrade the country’s infrastructure and diversify its economy – which is in turn leading to strong growth in the population levels – mean the economy is expected to expand at a rapid rate. Capital Economics predicts that GDP will expand by 6-7 per cent this year and next, making Qatar the fastest-growing economy in the Middle East.

All that means there should be plenty of room for further growth for the banks in the years ahead too.

“Qatari banks operate in a stable and supportive environment, with the government's significant capital investment programme driving rapid GDP growth and lending opportunities for domestic banks,” says Dupont. “Project momentum will remain strong in 2015. The banking sector is in good shape.”