Banking Special: Assets And Profits Soar In Qatar

The fast growing Qatari banking sector continues to benefit from substantial GDP growth in the Qatar economy. Real GDP growth rose to 19 per cent in 2011. This was driven by strength in oil prices and the substantial increase in LNG production to 75mnt (from 55mnt), which drove hydrocarbon sector GDP up by more than 30 per cent. Non- hydrocarbon sector output continued to grow at a sustained nine per cent rate because of ongoing capital expenditure on infrastructure development. Per capita income is now just under $100,000.

Against this favourable background, banks have enjoyed renewed growth in credit demand.

GDP growth in 2012 was much lower but only because of the self-imposed moratorium on further increases in LNG production until 2015.

Continued growth in capital expenditure on infrastructure has occurred.

Developments include the Barzan gas project, completion of the new Doha airport and gradual commencement of new projects (including those planned in relation to the 2022 World Cup event) –metro, railroad, roads, new port, land reclamation – come under an estimated $100 billion public sector investment programme. This will drive private sector investment, including in the residential real estate sector, where medium term forecasts are based on a rising population.

Consumer demand in 2012 rose on the back of the substantial increase (60 per cent to 120 per cent) in basic public salaries and pensions, awarded by the government to Qatari nationals in September 2011.

Budget surpluses transferred over the years to the Qatar Investment Authority, (QIA – the country’s Sovereign Wealth Fund), have now accumulated into a considerable stock of extra-budgetary, income-producing assets, held either in Qatar or internationally. Although there is no official estimate, QIA’s external assets well exceed the country’s whole, external, non-bank debt of $90 billion.

As a clear testimony to its strong credit profile, and despite the turmoil in international financial markets, Qatar successfully placed a $5 billion sovereign debt issue in November 2011, with five, ten and thirty year tranches (at 3.184 per cent, 4.635 per cent and 5.825 per cent yields, respectively).

Qatari banking sector credit growth grew by 28.3 per cent in 2011. Fastest growth was registered in foreign currency (FC) denominated loans, which rose to 46 per cent from 22 per cent of total loans, following an increase of 170 per cent.

Despite the reduction in QR interest rates, borrowers preferred FC funding because of its still lower cost and anticipated foreign currency funding needs.

Following the Arab Spring and given the ongoing turbulence in financial markets, depositors in Qatar – as in many other GCC countries – also demonstrated a greater preference for FC (particularly US dollar) denominated accounts.

Renewed growth in credit has been driven by the government sector, with credit growth rising by over 40 per cent.

The government sector now makes up for 40 per cent of domestic credit. Private sector loans grew by 19 per cent in 2011, with strong growth in credit to real estate (49 per cent), and renewed growth in consumer credit (20 per cent). In 2011, most Qatari banks registered a substantial growth in assets and net profits.

Following the outbreak of the international financial crisis in 2008, the government instructed the QIA to subscribe up to 20 per cent (approximately $5 billion), of new share capital of listed Qatari banks. Banks were also supported in 2009 when the government bought a portion of the equity portfolios they held on the Doha Securities Market. This neutralised volatility from the balance sheet of these banks and stabilised the local stock market.

Also in 2009, the Qatar government created a QR14.4 billion ($4 billion) fund, administered by Qatar Central Bank (QCB), which acquired real estate loans and investments from Qatari banks. These moves shielded banks from asset quality problems.

Strong loan growth in Qatar has been recorded despite the introduction of new lending limits by the QCB. As well as restrictions connected to real estate lending, the central bank has also issued tighter controls on lending to individuals, which are now closely linked to salary and debt service capability. The new limits are also applicable on existing loans and banks are able to reschedule terms in order to come within the new debt service limits.

Another implication of the stricter norms is that, in practice, a consumer may only obtain credit facilities and credit card limits from the bank which has a formal assignment of his salary.

In order to help reduce the overall level of interest rates and ease borrowers’ debt service, QCB capped interest rates on all consumer loans at the QCB lending rate plus a spread of 1.5 per cent, while monthly credit card rates have been reduced from more than 1.5 per cent, to one per cent.

However, for many banks, the impact on interest margins was minimal as competition had already driven margins down beforehand.

The closure of Islamic banking windows, enforced by regulatory changes from the QCB, has not produced major changes in the Qatari banking sector. Most conventional banks are maintaining their Islamic financings in run-off mode, or converting these to conventional loans.

Qatar National Bank (QNB), the largest bank in the GCC, and which holds a dominant position in Qatar, recorded net profit of QR6.2 billion, up by 15 per cent, for the nine months ending September 2012 compared to the same period last year. Total assets increased by 25.3 per cent from Q3 2011 to reach QR351 billion. This was the result of a strong growth rate of 41.9 per cent in loans and advances to reach QR238.6 billion.

Customer deposits recorded solid growth of 37.4 per cent to QR268.5 billion. The bank was able to maintain the ratio of non-performing loans to total loans at 1.2 per cent, a low level for the GCC.

QNB’s cost to income ratio stood at 16.6 per cent, one of the best ratios among financial institutions globally.

QNB’s international operations have gradually expanded over the years, bringing diversification of risk, sources of funding and income. QNB operates branches in London, Paris, Singapore, Yemen, Kuwait, Oman, Sudan and Mauritania. The bank has also invested in associate banks in Jordan, Iraq, Tunisia, Switzerland, the UAE and Syria.

In 2011, QNB completed the acquisition of a 69.6 per cent stake in Bank Kesawan, Indonesia, through a rights issue – a deal which boosted the group’s presence in a key market in South East Asia. QNB also launched its operations in Lebanon through the inauguration of its branches in Beirut and Juba, which serve Qatari visitors to Lebanon, and also opened a branch in South Sudan.

QNB in 2012 signed an agreement to buy a majority stake in the Morocco- based Union Marocaine des Banques.

The move is part of QNB’s strategy to expand its presence in Africa. QNB was also interested in acquiring DenizBank, the ninth largest bank in Turkey, with total assets of about $25 billion. However, Russia’s Sberbank was successful in acquiring the Turkish lender.