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For Qatari residents: Do you prefer a summer or winter World Cup 2022?




Will Doha Become the Financial Capital of the Region Soon ?

Written by  Author |   Wed, 02 May 2012 11:11

Strong fundamentals, promising future

Qatar is looking for yet a new type of branding, a blending of sorts between global energy and gas leadership and robust regional financial positioning. The two go hand in hand for nothing is done in Qatar without being followed by 9 or 12 zeros.

The establishment of the first bank in Qatar dates back to 1950 when a branch of British Standard Chartered Bank was set up. Qatar National Bank (QNB) was the first Qatari bank to be established back in 1965, after which several other financial institutions began to emerge in the country offering various retail and commercial banking services, both traditional and Islamic. Qatar's banking sector has expanded rapidly in the past decade. In 2000, Qatar had only 96 banking outlets distributed between headquarters and branches but by 2010, that number had doubled, despite the advent of electronic banking.

2010 was also the year Qatar was recognized as the largest LNG producer in the world with a production capacity of 77million tons per annum (mntpa). The Oil & Gas sector grew 19.5% during the period 2006-10. As per IMF estimates, the oil and gas sector grew 29.5% in 2011 as LNG production reached a climax of 77mtpa.

Qatar has developed a strong 2030 Vision which stresses the diversification of the economy through the advantages derived from the oil and gas sector. Diversification of the economy implies more attention to the non-oil sector, and the focus is currently firmly on the thriving financial services sector, which is strongly supported by the government. Qatari banks continue to benefit from solid macroeconomic fundamentals and high levels of domestic spending.

Is Qatar's banking sector healthy enough to become the regional leader in terms of lending? Qatar has limited banks' exposure to risk, enhanced liquidity and strongly increased confidence in the country's banking and financial markets. According to the Qatar Central Bank and figures published by AmeInfo, overall bank credit has risen to QR368.9 billion as of end-November 2011, representing a 23.5% year-on-year increase. The average rate of increase in the three months to end-November 2011 was an impressive 22.3%, while private sector credit growth in November has reached QR227.85 billion, up 22.3% year-on-year, and public sector credit has risen by an astonishing 28.6% year-on-year to QR141 billion. Particularly telling is the growing role of the national banking sector in funding public sector projects and other activities: according to Central Bank statistics, around 38% of overall bank credit is disbursed for these purposes. Such activity is unlikely to dim in 2012.

On the other hand, to Dubai-based Rasmala Investment Bank indicates that the Qatari banking sector is likely to grow at a rate of as much as 20% in 2012-14, with underlying returns on total capital of around the same level. The AmeInfo report echoes the investment bank's analysis that the sector's medium-term dynamics are solid, although it does warn that eventually there could be concerns regarding where capital will be deployed.

According to Rasmala, the announcement in September 2011 that the government had raised public sector pay by 60%, and the salaries of defense personnel of officer rank by 120%, is likely to fuel retail sector growth, in turn providing headroom for future consumer credit expansion. These enormous rises have presumably been matched by banks in Qatar, as well as many other industries; banks will be paying their Qatari employees more, so costs in the sector will likely rise.

Nevertheless, while the oversupplied and over-priced property market had led to a dip in consumer lending, consumer lending portfolios are likely to continue their rebound in 2012. Rasmala does warn that in 2012, a potential risk to banks in Qatar will be the new Islamic Banking regulations, which rocked the state's financial sector when they were announced in January 2011.

Qatari banks enjoy good financial solvency so much that they won the confidence of depositors and investors. The strength of the Qatari banking system was recently highlighted by global rating agency Standard & Poor's in a report. S&P Ratings Services believes Qatari banks are ‘well-cushioned from high-risk costs' as their "strong margins and efficiency" give them an "effective cushion" to face any potential increase in the cost of risk. S&P classifies the Qatari government as "highly supportive" toward domestic banking. "We recognize the government's strong track record of providing support to the banking system in times of stress," the report said. In another report, Deutsche Bank said Qatari banks now boast less risky asset profiles as well as improved liquidity, thanks to the government deploying significant resources to support the industry since 2008.

Financial Presence

There are six conventional local banks in Qatar, four fully Shari'ah-compliant Islamic banks, and one specialized bank (Qatar Development Bank (QDB), which is a state owned bank for the purpose of financing small and medium scale development projects). QNB is the largest bank in Qatar in terms of total assets. In the MENA region, QNB is considered the third largest bank by overall assets for the period ending June 2011 with $72 billion, just behind Emirates NBD's $78 billion and National Commercial Bank's $84 billion. QNB has recorded the strongest asset growth amongst the top ten banks in the MENA region at 42% in the year to June 2011. It has remained the fastest growing bank by assets amongst the top ten MENA banks in the second quarter of 2011, with total assets increasing by 8.6%.

The Islamic banks are:

  • Qatar Islamic Bank
  • International Islamic (QIIB)
  • Masraf Al Rayan
  • Barwa Bank

The Islamic banks account for 22% of market share by total assets. Most of the local banks had Islamic windows, as did one foreign bank, HSBC, but a government directive has forced these windows to close by December 2011.

The foreign banks are:

  • Arab Bank
  • Bank Saderat Iran
  • BNP Paribas
  • HSBC
  • Mashreq Bank
  • Standard Chartered
  • United Bank Limited

2012 earnings for all banks expected to grow in double digit

Qatar's banking sector data and budgets during the last few decades show an improvement and an ongoing growth at all levels. Today, the Qatari banking sector has excellent capitalization ratios which are the highest in the Arab region and beyond those required by the Basel Convention II. The average ratio of capital to assets reached 11.1% at the end of 2010 and a solvency ratio of 15%, twice the required rate.

Qatari banks are still witnessing high profitability rates and working in a better operational environment compared to their peers in the Gulf Cooperation Council (GCC). These profit margins are drawing strength from healthy economic growth and large spending by the public sector. Actually, the banks have increased their operational by a two-digit figure in 2011 thanks to a higher net interest income while cost continued to drop.

2012 will be no different. According to Global Investment House, Qatar's banking sector is expected to witness strong profitability with average earnings slated to see double-digit growth year-on-year (Y-o-Y) in 2012 on strong domestic lending.

Global says that the lending to the public sector had grown at a compound annual growth rate of 47% in the last five years as against 25% increase in lending to the private sector and highlighted the important role of the national banking sector in funding public sector projects and other activities. Going forward, the government's focus on developing the physical and social infrastructure will continue over the medium-term. This is expected to spur loan growth and sustain it at high levels, it said, adding that Qatari banks' proportion of loan books to the public sector are set to expand over the near term, after which public sector loan growth would slow as the large hydrocarbon projects reach completion.

Global expects public-sector-related loan growth to remain at double digits in the medium term. Within the private sector, near-term growth has been forecast to be mainly in the real estate sector and eventually trickle down to the contracting sector as projects get underway.

On the retail front, Global expects a "slight" pick-up in consumer lending following wage increases for Qatari public sector employees, with Qataris still accounting for the bulk of banks' retail business.

Banks' operating income is anticipated to increase by 19% driven by a 20% hike in non-interest income while cost is expected to inch up to 23% of operating income in 2012. Average returns on average equity and average assets are expected to be 19.8% and 2.7% respectively for its "coverage universe" comprising QNB, Commercialbank, Doha Bank, Qatar Islamic Bank and Masraf Al Rayan.

Highlighting that asset quality remains "extremely good", Global says that the non-performing loan (NPL) ratio of the banks under coverage was 1.3% with provisioning at 103.6%. Strong government support and timely intervention by the state meant asset quality has remained supreme. As a result, provisioning hasn't had a big impact on bank results, says Global.

Expecting Qatar's provision expense to rise, amounting to 5% Y-o-Y, Global indicates that NPLs would rise by a massive 30% Y-o-Y. However, NPL ratio will inch up by just 22bps (basis points), still remaining one of the lowest within the region. Cost of risk is expected to be normalized 44bps and would have limited impact on the profitability. Observing that Qatar banks as such do not rely much on capital market debt funding, Global forecasts that over 2011-15 the average deposit growth of its "coverage universe" would remain in line with loan growth, with the loan-deposit ratio remaining more or less constant.

Yet, Global expects that the government will play a major role in ensuring that the banking sector has sufficient liquidity to absorb excess liquidity in the system, as evidenced by the issuance of QR50 billion in bonds for domestic banks in January 2011.

In this picture of lending, capital movement and growth perspectives, you can bank on Qatar and the capital Doha to occupy their rightful place on the regional financial map, somewhere at the top, looking further up.

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