Moody’s downgrades outlook on Qatar’s banking system to negative

The outlook change was attributed to weakening operating conditions and continued funding pressures

August 8, 2017

Ratings agency Moody’s Investors Service has downgraded the outlook on Qatar’s banking system to negative from stable due to the weakening operating conditions and continued funding pressures.

The change in the outlook was also attributed to the potential weakening capacity of the Qatar government to support the country’s banks, the report from Moody’s said.

“Qatari banks’ reliance on confidence-sensitive external funding has increased in recent years due to a significant decline in oil-related revenues,” said Nitish Bhojnagarwala, vice president at Moody’s.

“This leaves them vulnerable to shifts in investor sentiment.”

Moody’s expects Qatar’s GDP growth to slow to 2.4 per cent in 2017 from high rates of around 13.3 per cent recorded during the 2006-2014 period. However, it remains the highest in the GCC, driven by high levels of government spending in preparation for the FIFA World Cup in 2022.

With a slowdown in GDP growth, domestic credit growth will also slow to the 5 per to 7 per cent range for 2017 and 2018, down from 15 per cent in 2015.

The gradual economic slowdown, combined with Qatar’s ongoing dispute with the GCC countries and continued challenges in the construction and contracting sector, will lead asset quality to dip slightly, found Moody’s.

“We expect system-wide problem loans to increase to around 2.2 per cent of gross loans by 2018, up from 1.7 per cent as of December 2016,” said Bhojnagarwala.

Despite this increase, the non-performing loan (NPL) ratio will remain among the lowest in the GCC heading into 2018.

The report also found that capitalisation will continue to remain strong providing Qatari banks with substantial cushions to absorb losses.

However, a prolonged regional dispute could lead to some outflows of foreign deposits and other external funding (which represents around 36 per cent of total banking system liabilities as of May 2017).

Hence the banks’ high liquidity buffers (at 24 per cent as of total assets as of December 2016) would likely reduce, as domestic deposits remain tight due to reduced oil
revenues.

“Against this backdrop, Qatari banks’ profitability will likely decline, with return-on-assets declining to around 1.4 per cent for 2017, from 1.6 per cent in 2016, driven by increases in funding and provisioning costs,” added Bhojnagarwala.

In July, Moody’s also downgraded the outlook for Qatar to negative from stable, mainly due to the “economic and financial risks arising from the ongoing [GCC] dispute”.

Saudi Arabia, UAE, Bahrain and Egypt severed diplomatic and travel ties with Doha in June, accusing the Gulf state of supporting terrorism and backing Iran. The crisis has not shown any signs of abating so far.

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