Onwards and upwards: The rapid growth seen in recent years looks set to continue

With Qatar experiencing strong and protracted economic growth, built largely on the back of a globally significant hydrocarbons sector, banking in this Gulf state has long been a robust business. The sector weathered the international credit crunch well and has since achieved double-digit asset growth, despite more recent global financial woes, and leading players are establishing strong overseas positions as they grow out of a highly competitive local market. The sector enjoys strong government backing, with a proactive state helping banks secure capital adequacy ratios (CARs) that are sometimes triple the Basel II requirements. The government’s plans for major infrastructure development in the next few years are also likely to provide fertile ground for further banking business. Qatar’s financial intermediaries are thus a solid, well-rated group, likely to see continued progress in the coming years.

NUMBER CRUNCHING: Qatar’s economy saw 16.6% real GDP growth in 2010 according to the IMF, with 18.8% predicted for 2011. A Reuters poll of economists found this slightly above the median forecast of 17.5%, but in either case, the economy is booming. In April 2012 Qatar National Bank (QNB) updated its forecasts for the period from 2012-13 based on the release of full-year 2011 GDP data by the Qatar Statistics Authority (QSA). QNB predicted a surge in nominal GDP of 19.8% in 2012, with an expected further rise of 5.4% in 2013 to QR798bn ($219.13bn). In 2010 per capita GDP in Qatar became the highest in the world at purchasing power parity (PPP), overtaking Luxembourg to hit $88,559. Also based on the QSA’s second-quarter 2012 GDP figures, QNB announced in April that it expects this figure to rise to $112,929 in 2012 and $114,340 in 2013.

Behind this phenomenal growth lies the successful exploitation of the North Field gas reservoirs. Qatar now has the world’s third-largest natural gas reserves, with these being transformed into a variety of products for export. Gas and gas-related shipments were responsible for 60% of total exports in 2010. Oil and gas exports contributed greatly to GDP in 2010 at $71.72bn, with natural gas being the main driver of growth since 2009 when LNG exports contributed more to Qatar’s GDP than oil for the first time.

With the price of gas linked to that of oil, the jump in global oil prices in 2011-12 has led to surpluses in Qatar. Benchmark Brent crude went from around $98 per barrel to over $122 between August 2011 and February 2012. The state has generally budgeted on the conservative side too, assuming a $55-per-barrel price for its 2011-12 budget.

REAL ESTATE SURGE: The non-oil and gas sector has also benefitted tremendously from this income. Real estate and construction have surged in recent years, while education and services have blossomed. The government is also making major moves to boost Qatar’s small and medium-sized enterprises, through initiatives such as the Qatar Development Bank’s (QDB) Al Dhameen programme, as it seeks to diversify the economy away from oil and gas.

This strategy underpins the government’s Qatar National Vision 2030, the first part of which – the Qatar National Development Strategy 2011-16 – is now under way. According to a statement from the Ministry of Finance, $160bn-170bn has been set aside for the next 10 years to be spent under these plans on infrastructure and hydrocarbons projects, with $130bn of planned expenditure through 2015. Some $85bn of these projects were reported to be under way in 2011. High-profile initiatives include preparations for the 2022 FIFA Football World Cup.

Despite the size of this spending surge, from 2010 to 2011 the overall fiscal balance was still in surplus at 2.7% of GDP, according to figures from the IMF, with a projected surplus of 7.2% for 2011 to 2012. This expenditure programme will provide Qatar’s banks with a key role in project financing, as well as in offering a range of other services to the many companies, government departments and individuals associated with the development drive. Business – already good – is set to get even better.

INDUSTRY PLAYERS: Qatar’s domestic banking sector consists of six local conventional banks, four Islamic banks, seven foreign bank branches and one development bank, the QDB.

In addition, many international banks operate offshore under the auspices of the Qatar Financial Centre (QFC). As of March of 2012 over 20 banks had been registered with the QFC, including Credit Suisse, Barclays, Bank Audi, Deutsche Bank Doha, Citibank and Crédit Agricole. The QFC comes under the QFC Authority (QFCA), with the QFC Regulatory Authority (QFCRA) responsible for seeing that registered companies comply with its rules and standards. The domestic banking scene is regulated by the Qatar Central Bank (QCB). The Islamic segment is also regulated by the QCB, though with the central bank lacking a specialised sharia advisory board, the Supreme Sharia Council at the Ministry of Awqaf and Islamic Affairs can be referred to should disputes arise. The QCB also has the authority to appoint sharia scholars on a case-by-case basis (see Islamic Financial Services chapter).

QATARI INVESTMENT AUTHORITY: Another important body in recent times has been the Qatar Investment Authority (QIA). This government sovereign wealth fund intervened as the global financial crisis hit in late 2008. In a precautionary measure, the QIA increased the capital of various local banks in two instalments – by 5% in February 2009 and a further 5% in December 2009.

The government also guaranteed all Qatari bank deposits and bought equity portfolios worth QR6.5bn ($1.8bn) and real estate portfolios worth QR14.4bn ($4.1bn) from local banks, respectively equivalent to 1.4% and 3.2% of total banking sector assets in 2009, according to the QCB’s 2009 annual report. In January 2011 the QIA made a further capital injection into several listed banks, increasing its stake in these institutions by a further 10%.

These moves shored up the sector and issued a strong message at a time of global jitters, namely that the Qatari banking system enjoyed the full support of the government. An added benefit of the intervention was that it boosted banks’ CARs to levels seldom seen. The average CAR by the end of 2011 was 20.6% according to the central bank, well above the 8% requirement spelled out under Basel II as well as the QCB’s 10% minimum.

While the move strengthened confidence in the face of worldwide contagion, Qatar’s banks themselves were nonetheless quite isolated from the centres of the crisis in the US and Europe. Indeed, while the eurozone has continued to experience difficulties, there remains little direct exposure in the local sector. According to an IMF report, cross-border exposure to European banks stood at around $3.3bn as of June 2011, a figure that represented less than 2% of the Qatari banking system’s total assets at that time, IMF calculations show.

CREDIT CHECK: In terms of sector structures, 2011 saw an important step forward with the entry into operation of the Qatar Credit Bureau. Prior to this, banks seeking to check clients’ credit records could only obtain a figure for the total amount of credit the client had outstanding. The credit bureau, a public sector body, can now offer a much more detailed history, thus reducing risk. The bureau is also now working on widening the types of institutions it can work with to include utilities, telecoms companies, car loan firms and insurers, rather than just banks.

Despite initial concerns over the quality of information, most bankers OBG talked to welcomed the initiative as both useful in its own right and a step toward a more comprehensive regulatory environment. “One year on, we’ve made good progress,” Sheikh Bandar bin Mohammed Al Thani, the Qatar Credit Bureau’s CEO, told OBG. “This is a very important tool for the financial sector at the current time and the Qatari economy as a whole in the future.”

Steve Troop, the CEO of Barwa Bank, also agreed, saying, “The credit bureau has been very well received by the industry: one outcome will be an increase in confidence and a willingness to lend by banks. There were some early teething problems associated with data quality and reporting, but this was only natural when the system was in its infancy.”

CENTRALISING REGULATION: Indeed, the creation of the Qatar Credit Bureau has also been seen as a step towards a long-term goal – the unification of all financial sector regulators. This has been under debate for some years, and would involve bringing together the QCB, the QFCA and Qatar Financial Markets Authority – which supervises the capital markets – into a single authority.

The benefits of having such a central organisation are that it would reduce the possibility of regulatory arbitrage and boost policy coordination. Unification would also give the authority a fuller picture of the activities of institutions that may have branches currently operating under several different regulatory regimes. This latter point, advocates argue, is important for maintaining financial stability and could streamline the industry. This in turn will help in the sector’s maturity and development, as industry players will invest with far greater confidence.

Others, however, suggest that the work each authority does is sufficiently different to require continued separation. A single authority does not itself guarantee financial stability either, while the current efforts of regulators in the UK, for example, to move away from the unified Financial Services Authority add weight to the argument that a single regulator is not necessarily the best way forward.

There may be a phased approach to this issue in the near future, with an authority established that would first have cross-representation on the boards of each of the three regulators. It would then work on developing greater harmonisation as well as increasing synergies. An assessment might then later be made as to the next steps, creating a new body fit for purpose. Further progress toward this was made in March 2012, when the QCB governor became chairman of the QFCRA. Steps such as the closure of Islamic windows at conventional banks have also been seen as part of a move towards regulatory unification (see analysis).

FACTS & FIGURES: According to the QCB, in April 2012 the sector’s total assets stood at QR727.2bn ($199.7bn), up from QR587.6bn ($161.4bn) a year earlier, equivalent to 23.8% growth. The QCB’s “Quarterly Statistical Bulletin,” released in June 2012, reported that the banking sector’s total assets stood at QR742.8bn ($203.9bn). Qatari banks accounted for QR692.2bn ($190.1bn) of the assets as of April 2012, split among conventional banks with QR521.5bn ($143.2bn), Islamic banks with QR167bn ($45.9bn) and specialised banks coming in with QR3.7bn ($1bn). The figures from the QCB for the second quarter of 2012 showed Qatari banks’ total assets totalling QR708.25bn ($194.48bn), with conventional banks having QR528.88 ($145.23bn), Islamic banks with QR175.28bn ($48.13bn) and specialised banks at QR4.08bn ($1.12bn).

In the first quarter of 2012 foreign banks held the remaining QR35bn ($9.6bn), split between non-Arab banks, which accounted for QR27.6bn ($7.6bn), and Arab banks, which held QR7.4bn ($2bn). The QCB’s figures for the second quarter reported foreign banks having QR34.56bn ($9.49bn) in total assets, with non-Arab banks holding QR26.43bn ($7.25bn) and Arab banks having QR8.13bn ($2.23bn).

LIQUIDITY: When it comes to liquidity, the QCB data shows the ratio of liquid assets to total assets at 36.3% as of the end of 2011, a slight decline on the 38.5% of 2010. The liquid assets to liquid liabilities ratio also shifted down, from 50.7% to 47.2%, over the same period. Meanwhile, the average CAR was 20.6% in 2011, up from the 16.1% recorded in 2010. The ratio of non-performing loans (NPLs) to total loans fell in 2011 to 1.7%, down from 2% in 2010, while the ratio of NPLs to total capital fell from 1.3% to 1% over the same period. Overall provisioning also increased, with the ratio of loan provision to NPLs rising from 85.1% in 2010 to 87.2% in 2011.

Profitability also grew strongly, with the ratio of net profits to shareholder equity standing at 18.6% as of the end of 2011. This was slightly down from the 19.9% recorded in 2010 but still high, while the net profits to total assets ratio rose from 2.6% to 2.7%. In October 2012 the sector leader, QNB, reported a jump in third-quarter profits of around 10%.

For many of the country’s banks, the jump in profitability was supported by an increase in net interest income, which generally compensated for less robust growth in non-interest income. At the same time, banks reduced the human resources component of their operating costs, with the ratio of wages and salaries to other expenses falling from 35.5% to 31.9% between 2010 and 2011.

LENDING ACTIVITY: Total credit facilities also increased significantly over 2011 and early 2012. According to the QCB, total credit stood at QR430.6bn ($118.2bn) as of April 2012, up 35.3% from QR318.3bn ($87.4bn) a year earlier. The ratio of total credit to assets also rose from 54.2% to 59.2% over the same period, while the ratio of total credit to customer deposits increased from 95.5% to 123.6%.

In terms of the distribution of credit facilities, the public sector took the largest share, recording QR172bn ($47.2bn) in April 2012, up from QR95.3bn ($26.2bn) in April 2011. Real estate took the second-largest slice, rising from QR55.7bn ($15.3bn) to QR78.1bn ($21.4bn) over the same period. Taking into account the addition of loans to contractors, the figures for the broader real estate and construction sector increased further to QR68.7bn ($18.9bn) and QR94.2bn ($25.9bn), respectively, over this same period. General consumption accounted for the next-largest slice in April 2012, rising from QR60.6bn ($16.6bn) to around QR71.3bn ($19.6bn).

CREDIT DISTRIBUTION: The pattern of credit also illustrates another characteristic of the Qatari banking system – that credit for the public sector is largely the preserve of Qatari banks. QCB figures show QR169.5bn ($46.5bn) in credit facilities for that sector came from Qatari banks in April 2012, while only QR2.5bn ($686.5m) came from foreign banks located in Qatar.

Loans in the retail banking segment were affected by the new regulations that capped loan amounts and interest rates announced by the QCB in April 2011 (see analysis). This regulatory change seems to have had the greatest effect on the profitability of foreign banks, many of which held major positions in retail banking (see analysis).

Pressure was also observed on net interest margins (NIMs) due to the limits on interest rates. For example, the second-largest bank by assets, Commercial Bank of Qatar, which has made a major push into consumer loans in recent years, reported its NIM down from 3.7% to 3.5% between September 2010 and September 2011, though for the sector overall the NIM remained stable, at 2.8% in 2011 compared to 2.9% in 2010.

SECURING STABILITY: With financial and banking stability one of the QCB’s main goals, it has demonstrated in recent years that it is more than willing to be proactive in securing this objective. The 2011 caps on interest rates and credit extensions were demonstrative of this, as was its decision in October 2010 to impose restrictions on real estate financing, subsequently modified in January 2011.

With some exemptions, a ceiling of 70% of the property’s collateral value was imposed on real estate loans secured against salary along with a maximum term of 20 years for settlement (in most cases of loans that are not secured against salary, these numbers are 60% and 15 years, respectively). The maximum monthly deduction was set at 75% of salary for Qataris and 50% for expatriates. The total financing provided by a bank for individuals and legal entities whose collection risk related to real estate was set at 100% of the bank’s Tier 1 capital.

At the same time, banks were given percentage limits on the amount they could invest in particular sectors, countries and asset classes. A maximum on total real estate investments – including investment in the bank’s own private real estate – cannot now exceed 150% of the bank’s capital and reserves. This exposure includes both loans already disbursed and loans pending drawdown. Additionally, “real estate” has been defined quite broadly, and a limit has been placed on banks’ equity participations. According to the QCB website, investments in a single company cannot exceed 5% of banks’ capital and reserves, while total investments in equity participations – excluding subsidiaries – cannot exceed 30%. These moves addressed two of the areas in which the government, through the QIA, had been obliged to act previously to guard consumers and banks from overexposure in real estate and equities. The limits also oblige banks to expand their interests into other types of assets. The restrictions on retail borrowing in 2011 also address the relatively high debt service ratio in Qatar, compared to its regional peers. HSBC Global research put this at around 40% for Qatari consumers in a May 2011 report, which is less than the UAE – at 52% – but higher than Saudi Arabia at 14% and Oman at 19%. A March 2012 HSBC Global research report also noted that the household debt service ratio increased to 75% of total monthly earnings from 50% for salaried employees, adding that while this is theoretically a relaxation of the rule, it will be difficult to extend loans to over-leveraged customers given the interest rate cap.

OUTLOOK: With Qatar likely heading for another year of solid GDP growth, alongside high global oil and gas prices, the macroeconomic fundamentals are very favourable for the banking sector. At the same time, given a population of around 1.75m, a sector that includes 18 banks, in addition to others at the QFC, could easily be considered crowded. Thus, the development of larger overseas profiles by Qatari banking institutions is likely to continue, with QNB in particular set to establish itself much more firmly on the global banking map, given its large asset base and existing overseas presence.

For new entrants, few expect new licences to be granted in the immediate future. Indeed, there may even be some consolidation ahead. However, given the huge potential in Qatar – with $130bn of infrastructure and hydrocarbons projects for the next three years alone – there is also a lot to go round. Refocusing away from retail toward potentially highly profitable project finance, with foreign and smaller banks focusing on private sector trickle-down, is likely to be the way forward. There may also be increasing linkages with insurers in the year ahead, as they try to spread their reach via the development of the bancassurance segment (see Insurance chapter). For 2012-13 though, most are bullish that assets, profits, loans and deposits will keep growing, and banks are looking forward to another good year.