Qatar's solid policy decisions set banking sector on the right path

Tightening liquidity conditions and a squeeze on profit growth proved to be the hallmarks for Qatar’s banking sector in 2016, as financial institutions across the Gulf were forced to respond to the effects of weak oil prices on the local economy. Despite tougher operating conditions, however, the sector remains resilient, with strong underlying fundamentals marked by high capital adequacy ratios and one of the world’s highest savings rates. Even though the diplomatic fallout within the GCC is having ramifications for the sector in 2017, the authorities are implementing mitigation strategies. Looking ahead, Qatar’s lenders are considering overseas expansion and domestic consolidation as strategies to drive future growth.

In Figures

According to data from Qatar Central Bank (QCB), total assets held by the state’s commercial banks amounted to QR1.26trn ($346bn) at the end of 2016, representing annual growth of 13.5% and equivalent to 157.5% of GDP at constant prices that year. This increase was higher than the long-term trend for the sector, which had registered a compound annual growth rate (CAGR) of 10.9% between 2012 and 2015. Total assets continued to grow in 2017, increasing by 5.8% through to end-September to reach QR1.34trn ($368bn).

Overall deposits increased by 11.8% to reach QR726.9bn ($199.6bn) in 2016, though this was down on long-term trends, which saw a CAGR of 12.4% in the three years following 2012. This slowdown was in large part driven by a fall in public sector deposits, which declined 11.1% to reach QR185.9bn ($51.1bn) by end-2016. In terms of domestic private deposits, growth was relatively muted, rising by less than 1%, with the entire burden of deposit growth taken up by non-resident deposits, which more than doubled to reach QR183.2bn ($50.3bn).

The decline in government deposits and the recourse to non-resident deposits give some indication of the tightening of liquidity experienced in 2016. The following year, however, saw the situation change somewhat, with overall deposits growing by 17.5% to QR797.8bn ($219bn) in the 12 months to September 2017. The recent upswing was driven largely by public sector deposits, which increased by 18% in the January-May period of and surged by 51% between May and September due to a large injection of public funds used to help offset liquidity worries following the imposition of the regional blockade of Qatar in June.

These concerns arose due to a sharp drop off in non-resident deposits, which fell by 28.3% to QR142.8bn ($39.2bn) over the first three quarters of 2017, causing private sector liabilities overall to decline by 1.5 % to QR352.4bn ($96.8bn), despite resident deposit growth of 22% to QR655bn ($179.9bn). While the M2 money supply fell 4.6% during 2016 to QR497.5bn ($136.6bn), the increase in government deposits in the June-August period of 2017 helped the figure rise by 9% to QR564.8bn ($155.1bn) in the first three quarters of the year.

Formation 

Domestic-based commercial banking in Qatar dates back to the mid-20th century, when a number of regionally based banks began operating in Doha. Standard Chartered – known then as Eastern Bank – led the way in 1950 and was followed in 1956 by Ottoman Bank, which would later become the International Bank of Qatar (IBQ). A notable advance occurred in 1964 when Qatar’s government, in conjunction with the local business community, launched Qatar National Bank (QNB). QNB is the largest commercial bank in Qatar by far, accounting for over half of the industry’s total assets. Ownership remains equally divided between the Qatari government – in the form of the Qatar Investment Authority (QIA) – and members of the public.

The financial sector advanced throughout the 1960s, in line with the increasing autonomy and eventual independence of Qatar itself. In 1966 – following a 35% devaluation of the Gulf rupee, which had been the previous currency of the region and was pegged to the Indian rupee – Qatar and Dubai formed a currency union and issued the Qatar-Dubai riyal, which was pegged to the pound sterling. After Dubai joined the UAE in 1971, a newly independent Qatar established the Qatar Monetary Agency (now the QCB), launching the Qatari riyal in 1973.

The following four decades witnessed a steady expansion in financial institutions. In 1975 a group of Qatari businessmen set up Commercial Bank of Qatar (CBQ), the country’s first privately owned bank and currently ranked third in terms of assets. It was followed by Doha Bank in 1979, Ahlibank in 1983 and most recently Al Khaliji Bank, which listed in 2007.

A concurrent development in the Qatari financial services market has been the growth of the sharia-compliant segment since the early 1980s. There are currently four commercial Islamic banks operating in Qatar. The first and largest is Qatar Islamic Bank (QIB), which was founded in 1982. It was followed in 1991 by Qatar International Islamic Bank (QIIB), Masraf Al Rayan (2006) and Barwa Bank (2009). Islamic banking now accounts for around 26% of total assets in the sector.

Expansion 

With the emergence of Qatar as a major exporter of gas in the mid-1990s, assets managed by the banking sector witnessed rapid expansion alongside growth in the hydrocarbons sector. Total banking assets doubled from 1991 to 2000, growing from QR28.4bn ($7.8bn) to QR55.1bn ($15.1bn), and from that point they more than tripled, reaching QR189.5bn ($52bn) by the end of 2006. During the global financial crisis of 2008, the government responded by offering guaranteed bank deposits, as well as by instructing the QIA to supply emergency capital where requested. In 2009 the government extended its assistance to include the purchase of investment portfolios from the sector to encourage banks to continue lending.

More recently, Qatar’s domestic commercial banks have been joined by a number of new financial institutions operating out of the Qatar Financial Centre (QFC), which was established in 2005 through Law No. 7 of 2005 – later amended by Law No. 2 of 2009 and Law No. 14 of 2009. While the QFC is classified as an onshore financial centre, it nonetheless operates under a separate legal framework based on English common law and benefits from a lower tax framework and no foreign ownership restrictions. As of 2015 there were a total of 230 firms operating in the QFC, including 64 in regulated financial services and 54 investment and management structures. In 2016 Qatar First Bank became the first bank based in the QFC to list on the Qatar Stock Exchange (QSE).

Regulation 

Overall responsibility for regulating the financial sector lies with the QCB under Law No. 13 of 2012. The QCB is assisted in this task by two further subsidiary regulators: the QFC Regulatory Authority, which is responsible for overseeing institutions operating from the QFC, and the Qatar Financial Markets Authority, which is responsible for regulating the QSE, listed companies and tradeable instruments. Coordination between these three bodies takes place via the Financial Stability and Risk Control Committee, which meets on a monthly basis to study risks and propose policies for the sector.

The QCB’s regulatory agenda is currently driven by the Strategic Plan for Financial Sector Regulation (SPFSR), which sits within the broader framework of the Qatar National Vision 2030 and successive five-year plans known as the National Development Strategies (NDS). The first SPFSR ran from 2013 to 2016, and focused on five areas: enhancing regulations, primarily through adherence to the Basel III framework; deepening financial market infrastructure; promoting regulatory integration; building human capital; and customer and investor protection. Particular advances were made in the field of domestic financial market infrastructure, with the QCB issuing Treasury bills (T-bills) in 2011, bonds in 2013, and long-term, 10-year maturities in 2015. The bonds are listed on the QSE for secondary trading, although as of yet the secondary market is not very liquid (see Capital Markets chapter).

Looking Ahead

The new SPFSR, which will run alongside the second NDS over 2017-22, was anticipated to be published in the second quarter of 2017. While the precise details of the plan were not yet know at the time of publishing, sources at the QCB have reported that the focus will be on assessing gaps from the first plan and adapting these to current economic circumstances. Like its predecessor, the new plan is expected to be divided into five or six areas. To that end, QCB staff liaised with several NDS committees, including the economic panel in the field of liquidity management, the social panel and environment initiatives. There are also likely to be further steps taken to improve consumer protection, including the creation of a court of consumer protection and a deposit protection scheme.

Beyond the new framework of the SPFSR, the coming year will also see preparations for two further changes to the regulatory and fiscal regime. Qatar will transition to International Financial Reporting Standard 9 on January 1, 2018, which involves banks changing to the expected credit loss model and some increases in provisioning. Also anticipated to come into effect in 2018 is the new GCC-wide value-added tax, expected to be set at 5%. A draft law on the proposed levy was passed in May 2017.

Performance

Overall, 2016 was a mixed year for Qatar’s conventional domestic banks. While all lenders grew their total assets and remained profitable, only two maintained profit growth over the previous year. QNB, Qatar’s largest bank by assets, saw net profits grow by 10%, reaching QR12.4bn ($3.4bn); while the market’s smallest bank by assets, IBQ, saw profits rise by 25%, reaching QR500m ($137.3m).

The remaining banks, however, witnessed declines in net profit of varying degrees in 2016. Ahlibank saw a slight dip of 2.4%, reaching QR631.7m ($173.5m), while Doha Bank saw net profit fall by 23% to QR1.1bn ($288m). In the final quarter alone, Doha Bank’s figures were down by 84.8% year-on-year (y-o-y). Al Khaliji saw a decline of 32%, to reach QR426.6m ($117.2m); while at CBQ profits dropped by 65%, reaching QR501m ($137.6m).

Dividends across the sector remained largely flat, with QNB offering an unchanged QR3.5 ($0.96) per share but a reduced share bonus of 10% – down from 20% in 2015. Doha Bank’s dividend was unchanged at QR3 ($0.82) per share, while Al Khaliji and Ahli-bank both witnessed small declines in the value of dividend: the former dropping from QR1 ($0.27) to QR0.75 ($0.21) per share, the latter from QR1.5 ($0.41)to QR1 ($0.27) per share, though with a share bonus of 5% remaining unchanged.

The picture for assets was similarly mixed. Total assets at QNB increased by 34% to reach QR720bn ($197.7bn), which was a notable acceleration on the previous year’s growth of 10.7%, according to the bank. Similarly both Ahlibank and IBQ witnessed an acceleration in asset growth, with the former expanding by 18.2% to reach QR38bn ($10.4bn) and the latter growing by 12% to reach QR35.8bn ($9.8bn). This was compared to an increase of 2.9% and 3.3%, respectively, in 2015.

By contrast, CBQ, Doha Bank and Al Khaliji witnessed a cooling in asset growth over 2016. CBQ’s slowdown was marginal, falling from 6.7% to 5.6%, with total assets amounting to QR130.4bn($35.8bn). Doha Bank witnessed only a slight fall in the rate of asset growth, rising 8.5% for the year as opposed to 10.3%, to a total of QR90.4bn ($24.8bn). Al Khaliji, meanwhile, fell from a 10.5% growth rate to 7%, reaching QR60.6bn ($16.6bn).

Market Conditions

Much of the decline in profitability and the slowdown in asset growth can be attributed to the effect of tightening market conditions on banks throughout 2016. In particular, low oil prices in the first half of the year had a direct impact on liquidity, partially manifested through the already mentioned squeeze on money supply. Another sign of increasing stress though was the rise in loan-to-deposit ratios (LDRs), which reached 114.9% in November 2016. The growth in LDRs could be largely attributed to a drawdown of deposits – particularly from the public sector – coupled with continued growth in demand for finance due to infrastructure investment. By contrast, the rise in non-performing loans among some banks appears to be a direct result of cash flow problems being caused in the real economy by low oil prices. The situation is thus likely to improve as oil prices recover.

“Qatar’s economy remains in a very strong position. Many of the major infrastructure investments that are being made are enhancing the connectivity of the country and the rest of the world. This creates new opportunities for international investors with creative ideas,” Joseph Abraham, CEO of CBQ, told OBG. A further improvement to market conditions followed on from a change in monetary policy at the QCB in December 2016. While the Qatar Monetary Market Rate deposit and lending rates were raised, to shadow moves made by the US Federal Reserve, the repo rate was cut by more than two points, from 4.5% to 2.25% – providing relief for banks.

Despite these efforts to ease liquidity restraints, the blockade imposed by the UAE, Saudi Arabia, Bahrain and Egypt in June 2017 saw conditions become more challenging once again. In attempt to counteract the rapid withdrawals made by international financial institutions as the political and economic blockade escalated, Qatar pumped billions of dollars into the country’s banking system, through government and government-related entity deposits. The public sector made new deposits of $10.9bn in June, $6.9bn in July and $8bn in August. Following these moves, Moody’s downgraded its outlook on Qatar’s banking system in August 2017, citing weakened operating conditions and continued funding pressures on Qatari banks. Even so, many shareholders remain optimistic about the sector’s resilience.

“Regardless of Qatar’s recent challenges, with the right products leading to the right returns, people will invest,” Ayman Zaidan, acting CEO of Qatar First Bank, told OBG. “This is what we have seen in Doha.”

Shifting Policy

In general, Qatar’s policy has shifted in recent years away from a system in which the government provides the lion’s share of deposits, to one in which banks are encouraged to become more self-reliant and seek funding from elsewhere. One area where Qatar’s banks may increasingly come to seek funds is through the international syndicated loan market, particularly among investors in Asia. In this respect, QNB has perhaps provided an indication of things to come, having secured a $1bn syndicated loan in January 2017 from a consortium of Asian banks, including the Agricultural Bank of China. The loan, which has a three-year maturity, was priced at 120 basis points above the London Interbank Offered Rate, and follows a $2.4bn loan secured in May 2015 from a consortium of European and Asian banks priced at 105 basis points above the Euro Interbank Offered Rate. Similarly, in July 2016 CBQ secured a $166m, three-year loan from a consortium of seven Asian banks, with Mizuho Bank of Japan acting as bookrunner.

The increasing search for funds from beyond Qatar and the immediate GCC can be seen as part of a broader trend within Qatar’s financial sector to look abroad for new growth opportunities. In 2016 QNB completed its €2.7bn purchase of Turkish lender Finansbank – the fifth-largest bank by assets in Turkey. In July of the same year CBQ announced it would increase its ownership of medium-sized Turkish lender Alternatifbank to nearly 100%. The two acquisitions follow a long-term trend among Qatar’s larger banks of expanding into European and Middle Eastern markets, with QNB in particular already operating in more than 27 countries. Should current plans for domestic consolidation prove successful, further foreign expansion may be on the cards in the medium term (see analysis).

Outlook

“2017 has been something of an adjustment year as the country faces this new reality. Preparation and planning taking place now will generate a strong rebound across the entire economy in 2018,” Abdulla Bukhowa, CEO of Standard Chartered Qatar, told OBG. A recovery in oil prices, coupled with a return of government and government-related entity deposits, should see a reduction in LDRs from their previously strained levels, while the QCB’s policy environment also seems better aligned going forward with market conditions.

One currently unanswered question for the sector will be the direction that banks take for future growth. With net profit and asset growth decelerating for many Qatari banks, consolidation and overseas expansion may be the best potential strategies.