Years of expansion and oversight lend stability to Qatar's banking sector

After half a decade of strong growth, Qatar’s banking sector is well positioned to weather regional economic volatility in 2016. As of the end of the first half of 2015 the country was home to the third-largest banking industry in the GCC, boasting total assets of $293bn. The sector consists of 18 institutions, including six domestic conventional lenders, Qatar Development Bank (QDB), which provides services for small and medium-sized enterprises, four domestic sharia-compliant banks and seven foreign institutions.

Banking assets are highly concentrated in the domestic market, with the top five local institutions accounting for more than three-quarters of total sector assets, according to data from Qatar National Bank (QNB), the largest bank in the country by a significant percentage, and one of the largest financial institutions in the Middle East.

Rapid Expansion

Taken as a whole, Qatar’s banking sector registered a compound annual growth rate (CAGR) of 15.3% over the period 2010-14, which was the fastest growth rate among all six GCC member states. Local factors look set to support continued growth, in particular the government’s current spending commitments, which include building infrastructure in preparation to host the 2022 FIFA World Cup. This bodes well for banking, which has traditionally relied on government projects for growth.

At the same time, the industry’s continued reliance on public sector economic activity has the potential to generate a number of challenges in the coming years. Indeed, according to the US-based credit rating firm Standard & Poor’s (S&P), Qatar’s banking sector could face declining profitability amidst tightening liquidity and credit losses in 2016-17. Traditionally, domestic banks have benefitted from considerable public sector deposits, which have served as a reliable source of liquidity for decades. In recent years, however, declining hydrocarbons revenues have resulted in the government making withdrawals to cover expenses.

Consequently, since late 2015 local players have begun to air concerns of an impending liquidity crunch. “A large amount of government deposits have exited the banking system over the past year or so,” Edward Tat Seng Wong, the CFO of Qatar International Islamic Bank (QIIB), told OBG. “In itself this is not a problem, as Qatar still boasts very high liquidity rates. The challenge now is to keep the debt-to-deposit ratio in check while continuing to lend.”

Slowing, But Steady

Given this situation, many local players expect to see a slight slowdown in asset, credit and deposit growth in the coming years. As S&P noted in a report published in February 2016, “although Qatari banks continue to operate with some of the best asset quality metrics in the GCC, we think some deterioration over the next few years is likely.” The longer-term outlook, however, is more optimistic, with Qatar’s strong fundamentals, ambitious infrastructure development programme and steady population growth widely expected to contribute to substantial expansion in banking activities over the course of the coming decade and beyond.

Recent development initiatives and regulatory policies enacted by the Qatar Central Bank (QCB) have strengthened the sector considerably over the past half decade, setting it up to withstand short-term uncertainty, for instance. “Does tightening liquidity due to falling oil prices signal a decline in the banking sector?” asked Farah Ahmed Hersi, the executive manager of economics and research at the treasury department of Masraf Al Rayan (MAR), a Qatari sharia-compliant bank. “The answer is clearly no. Context is important here. Qatar is in a very strong position, as the country enjoys the highest per capita income in the world and has built large external and fiscal accounts over the years, which now gives the country a large wealth position. Qatar’s economic outlook will remain resilient, supported by strong fundamentals, despite the current conditions in the oil market.”

Auspicious Beginnings

The history of banking in Qatar dates back to the mid-1900s. Prior to this period Doha – like most other Gulf capitals in the first half of the 20th century – relied entirely on foreign financing, and particularly British institutions. One of the oldest banks operating in the country was the Ottoman Bank, which was established in 1956 and would later become International Bank of Qatar (IBQ). In an effort to jump-start the local financial sector, in June 1964 Qatar’s government, in conjunction with the local business community, launched QNB.

As the country’s first domestically owned commercial bank, the lender was involved in a number of major financing projects early on, including, in 1966, providing funding for Doha International Airport, which was replaced by the new Hamad International Airport in 2014. Until the mid-1960s the chief currency in circulation in Qatar and many other Arab states was the Gulf rupee, which was pegged to the Indian rupee and, in turn, to the pound sterling.

In 1966 – after a 35% devaluation of the Indian rupee – Qatar and Dubai opted to form a currency union and together issued the Qatar-Dubai riyal, which was linked to the pound sterling. Then, after Dubai joined the UAE in 1971, the newly independent Qatar established the Qatar Monetary Agency – which would eventually become the QCB – before launching the Qatari riyal in 1973.

In 1975 a group of Qatari businessmen formed the Commercial Bank of Qatar (CBQ), the country’s second lending institution and first privately owned bank. During this period QNB was working to expand abroad – the institution opened its first foreign branch in London in 1976, followed by a second in Paris in 1978. Doha Bank, meanwhile, was established in Qatar in 1978. Over the ensuing decades a number of new financial institutions set up shop in Qatar, including Ahlibank, which opened in 1983; Qatar Islamic Bank (QIB), the nation’s first sharia-compliant financial institution, in 1982; QIIB in 1991; MAR in 2006; Al Khaliji Bank in 2008; and Barwa Bank in 2009.

Like other burgeoning financial sectors across the region, beginning in the late 1990s Qatar’s banking industry grew rapidly on the back of steadily expanding domestic and regional economic growth and an uptick in foreign direct investment (FDI). In the 1990s, for instance, as Qatar invested heavily in ramping up liquefied natural gas production and exports (see Energy chapter), the nation’s total banking assets nearly doubled, from QR28.37bn ($7.8bn) in 1991 to QR55.12bn ($15.1bn) by 2000, according to data from the QCB. This expansion continued to accelerate through much of the 2000s, with total banking industry assets more than tripling to reach QR189.48bn ($52bn) by the end of 2006.

While Qatar was largely insulated from first-hand effects of the 2007-08 international financial crisis, the nation’s banks did experience some challenges during this period, including liquidity issues and a slowdown in profits late in 2008, in particular, which was primarily the result of a loss of confidence across the regional market. In the wake of the crisis, however, the QCB, in conjunction with Qatar’s government, moved to shore up the country’s financial sector, guaranteeing Qatari bank deposits and instructing the state’s sovereign wealth fund, the Qatar Investment Authority (QIA) to supply emergency capital to any financial institution that required it.

Furthermore, in March 2009 the government announced that it would purchase the sector’s investment portfolios, in an effort to encourage local banks to continue to lend. Longer term, since the downturn the government has rolled out a series of new initiatives aimed at ensuring that Qatar’s financial sector is secured against potential future volatility.

Oversight & Regulation

The banking sector is regulated by the QCB. In recent years the central bank has developed and carried out major policy updates with regard to Qatar’s financial sector. As part of a far-reaching reform effort launched in 2012, for instance, the regulator instructed the nation’s conventional lenders to halt all sharia-compliant banking activities, which they had been licensed to carry out through so-called Islamic windows since 2005. The decision benefitted the country’s four fully Islamic banks, which had previously been forced to compete with their conventional counterparts. Today conventional and Islamic banking operations are carried out by separate segments of the banking industry.

Also in 2012 Qatar passed Law No. 13, under which the QCB was put in charge of all financial activities in the country, including investment and capital markets-related entities and businesses registered with the Qatar Financial Centre Regulatory Authority (QFCRA). Prior to this law, Qatar had been home to two separate regulatory environments, one overseen by the QCB and another by the QFCRA, the latter of which functioned much like an offshore system, offering foreign firms a relatively straightforward way to set up shop in Qatar. A number of major Qatari and foreign banks are registered with the QFCRA, for instance. This dual system is still in place today, though with the QCB at the helm, the two financial industries have become increasingly integrated.

In Figures 

As of the end of March 2016 – the latest data available at time of publication – total banking assets in Qatar had reached QR1.142trn ($313.4bn), up from QR1.121trn ($307.6bn) three months prior, at the end of 2015, and also an increase from the yearend 2014 total of QR1.012trn ($277.7bn), according to data from the QCB.

It is clear that Qatar’s banking sector has been on a growth path over the past half decade, with total banking assets rising at a CAGR of 14.1% from the beginning of 2010 through the end of the first half of 2015, according to data from QNB. From $157bn in total assets at the end of 2010, the sector’s holdings almost doubled to reach $293bn by mid-2015. As of December 2015, domestic credit accounted for 59.4% of total sector assets, up from 58.4% at the close of 2014 and 53.8% at the end of 2009, according to data from the QCB. The next-largest contributor to overall sector assets as of December 2015 was domestic investments, at 12.7% of the total, up from 12.5% at the end of 2014 and 8.9% in 2009. This was followed by credit and investments abroad, which accounted for 12.5% of the total at end-December 2015, up significantly from 11.2% of the end-2014 total and 9.5% of total sector assets in 2009. Rounding out the December 2015 asset base was capital due from banks abroad, at 7.3%; cash and reserves, at 3.6%; and other assets, at 4.5%.

Credit & Deposits

As these figures suggest, Qatari banks have seen a considerable uptick in both credit issuance and deposits over the past half decade. Indeed, according to QCB data, as of December 2015 the sector had QR752.6bn ($206.5bn) in outstanding loans, up from QR653.4bn ($179.3bn) at the end of 2014 and an increase of 138% from QR315.4bn ($86.5bn) at the end of 2010. From end-2010 through December 2015 the banking sector’s loan portfolio posted a CAGR of 19% in total. Over the same span of time, bank deposits in Qatar grew by a CAGR of 16.2%, more than doubling from QR306.8bn ($84.2bn) at the end of 2010 to QR650.3bn ($178.4bn) as of December 2015, according to QNB data. This compares with total deposits of QR601.1bn ($164.9bn) at the end of 2014 and QR575.4bn ($157.9bn) at the end of 2013.

Loan growth in recent years has been driven in large part by demand from the construction, property development, industry and infrastructure sectors, all of which have benefitted from the government’s ongoing and ambitious long-term development plans (see Economy chapter). Since 2014, in particular, a steadily growing percentage of bank lending has gone to the private sector, which accounted for more than 57% of the total loan book by December 2015.

While private contracting and industrial firms have played a key role in this shift, so too have retail customers. Indeed, in December 2015 private sector credit issuance grew by almost 20% year-on-year (y-o-y), compared to a modest 2% increase in public sector credit over the same period.

Qatar’s rapidly expanding population has been a key factor in loan book expansion in recent years. By the end of 2015 the country was home to 2.42m people in total, up some 61% from 1.5m just seven years earlier, at the end of 2008. Over the past decade the nation’s population has more than doubled. Population growth, paired with rising incomes over the past half decade, have contributed to rising demand for retail lending and, at the same time, steadily expanding bank deposits, the latter of which were up 8.2% y-o-y as of end-December 2015. As previously mentioned, over the same period public sector deposits declined by 12.7%.

“There has been considerable growth in both deposits and lending in recent years, driven largely by infrastructure spending and domestic demand, both on the retail and corporate sides,” Sheikh Faisal bin Abdulaziz bin Jassem Al Thani, chairman and managing director of Ahlibank, a local lender, told OBG. “Nonetheless, in 2015 and 2016 in particular, we have seen a lot of caution from the sector. People are looking ahead and taking the decision to play it safe.”

Major Players

The bulk of the sector’s assets as of end-2015 were concentrated in only a handful of the country’s largest banks. QNB, the oldest domestically owned bank in the country, dominates the sector, accounting for nearly 48% of total banking assets at the end of the year. QNB exceeds the next-largest institution – QIB, the largest sharia-compliant institution in the country, which boasted 11.3% of total banking assets in the same period – in size by a factor of four. Third in line is CBQ, with 11% of total assets. This was followed by Doha Bank, with 7.4% of Qatar’s banking sector assets, and MAR, also with 7.4%. The remaining five domestically licensed institutions – namely QIIB, Ahlibank, Barwa, Al Khaliji Bank and IBQ – together made up 18.4% of total end-2015 assets, according to OBG analysis. Meanwhile, during the same period foreign institutions accounted for 3.6% of total sector assets. The top five banks have high credit ratings, due in no small part to strong and sustained support from the government. As of early February 2016, S&P maintained an A+ rating for QNB and A- ratings for CBQ, QIB and Doha Bank, for instance. Qatar’s top lenders have similarly high ratings from Moody’s and Fitch. This has allowed them relatively easy access to international bond markets, which they have taken advantage of in recent years, in particular, as they work to meet new, stringent capital requirements as laid out by the QCB in line with the Basel III international regulatory framework for banks (see analysis).

Market Leaders 

QNB recorded a profit of QR11.3bn ($3.1bn) in 2015, up 8% from the previous year. The institution, half of which is owned by the government via the QIA, is one of the largest listed firms on the Qatar Stock Exchange, where it had a market capitalisation of QR120.66bn ($33.1bn) as of April 2016. By the end of 2015, QNB was active, either directly or through subsidiaries, in 27 countries, including most of the Middle East, Africa and Asia. QNB also owns 20% of the pan-African institution Ecobank Transnational, and in 2013 it completed the acquisition of a controlling stake in NSGB, an Egypt-based bank, now known as QNB Al Ahli Bank. More recently, in June 2016 the lender completed its acquisition of a 99.81% stake in Turkey’s Finansbank for €2.7bn, a deal that was announced in December 2015. Additionally, QNB has a number of branches and subsidiaries in numerous countries including Jordan, the UAE, Tunisia, Iraq and Indonesia. In March 2015 QNB opened a representative office in Vietnam and the same year received approval to establish a branch in Saudi Arabia. In March 2016 the bank also opened a representative office in Myanmar.

CBQ, meanwhile, reported a net profit of QR1.46bn ($400.6m) in 2015, down around 25% on the previous year, though the institution also reported a 6.7% increase in total assets. Additionally, customer deposits at CBQ rose by 13.4% in 2015 and loans and advances were up 5.6%. Since 2008 QIA has owned a 16.7% stake in the bank. Other shareholders include domestic and foreign corporates and individuals via the Qatar Stock Exchange. In addition to a domestic network of more than 30 full service branches and 157 cash machines, CBQ has stakes in a number of foreign institutions, including Turkey’s Alternatifbank, the UAE-based United Arab Bank and the National Bank of Oman. “Our markets have proved challenging during the course of the year, as economic growth slowed amidst concern over the prospects of the global economy,” Abdulla Saleh Al Raisi, CBQ’s CEO, said at CBQ’s annual general meeting in March 2016.

Islamic Finance

As in many markets in the GCC and around the world, Qatar’s sharia-compliant banks have seen rapid expansion in recent years. In December 2015 the nation’s Islamic banks saw asset growth of 17% y-o-y, while conventional banks reported an uptick of 9% in assets over the same period, according to data from the QCB. Since the QCB mandated the closure of Islamic windows in 2012, sharia-compliant institutions have successfully worked to consolidate their business and compete more effectively with conventional lenders. “There used to be a difference between Islamic and conventional banks in terms of operating costs, where the former were more expensive to run,” QIIB’s Wong told OBG. “But this is not the case anymore. Now the Islamic sector is competitive with the conventional market, which has allowed us to gain a steadily growing percentage of market share in recent years.”

Indeed, according to QCB data, as of end-2015 sharia-compliant banks boasted assets of QR304.85bn ($83.7bn), which represented more than 28% of total banking sector assets, according to OBG’s calculations, up from 25.8% at the end of 2014, for instance. Islamic banking assets are concentrated at the largest banks, with QIB holding around 41% of total sharia-compliant assets at the end of 2015, up from 32% a year earlier. MAR, the second-largest Islamic bank in Qatar, accounted for almost 27% of the country’s total Islamic assets at the end of 2015, while Barwa made up 13.3% and QIIB held 13.1%.

Outlook

Recent economic developments in Qatar and across the wider region have made local bankers somewhat wary about the future, with tightening liquidity and the expected state deficit in 2016 weighing on the minds of sector players. Nonetheless, Qatar is well positioned to face a period of market stagnation. Indeed, as a result of strong growth at most institutions over the past half decade, plus the development and implementation of relatively progressive risk- and capital-management policies by the central bank over the same period, in line with the Basel III banking regulation accords, most financial institutions in Qatar are in a strong position. “Yes, people are cautious, but if you actually look at the financial situation for the market as a whole, we foresee very few reasons for long-term concern,” Daren Warner, CFO of IBQ, told OBG. “In fact, we believe there is a lot of room for banking growth in Qatar.”