The banking sector has seen steady, robust credit growth in recent years, even as macroeconomic indicators throughout the GCC have signalled a challenging period ahead. From end-2010 through December 2015 bank loans in Qatar expanded at a compound annual growth rate (CAGR) of 19%, according to figures from Qatar Central Bank (QCB). By the end of 2015 the sector’s loan book had reached some QR752.6bn ($206.5bn), more than double the QR315.4bn ($86.5bn) in outstanding loans as of 2010.
The majority of this rise is a result of credit facilities to the private sector. In the 12 months leading up to the end of December 2015 private sector credit expanded by nearly 20%, as compared to an increase of 2% in public sector credit during the same period. Driving this expansion has been loans to industrial players, contractors and real estate developers. More broadly, vigorous population growth in recent years has resulted in rising demand for consumer goods and, as such, retail credit. “This is a conservative but very stable banking market,” Sheikh Faisal bin Abdulaziz bin Jassem Al Thani, chairman of Ahlibank, a local lender, told OBG in late 2015. “The credit growth in recent years has been driven by retail demand, for sure, but also by government-linked development projects, which we expect to be a continued source of demand for some time to come.”
While most financial institutions expect to see continued credit growth in Qatar in the coming years, the country’s banking sector faces a number of challenges in this regard. Like much of the rest of the nation’s economy, banking revenues are closely tied to a raft of large-scale, government-led construction projects and similar public sector activities. With oil and gas prices at a historic low as of early 2016, hydrocarbons-reliant countries throughout the GCC region have been cutting back on spending and withdrawing banking sector deposits in order to balance their budgets. Qatar expects to post a budget deficit of QR46.5bn ($12.8bn) in 2016 – the nation’s first deficit in a decade and a half. One result of this situation has been a steady withdrawal of public deposits from the domestic banking sector over the past year in particular, which has stoked concerns about availability of liquidity and, as such, future lending capacity. Indeed, according to a February 2016 report on Qatar’s banking sector published by the international credit ratings agency Standard & Poor’s (S&P), the industry will likely see slower loan growth through 2016-17. That said, credit issuance is expected to continue to expand throughout this period, despite tightening liquidity and other related factors.
Like the other economies in the Gulf region, in the wake of the 2007-08 international financial crisis Qatar saw a decline in credit issuance, as banks and other lenders sought to shore up their books in preparation for a period of expected volatility. Like many of its neighbours, Qatar’s banking sector experienced rapid lending growth during the 2002-08 period. At the same time, however, the country’s conservative fiscal policy and relatively cautious private sector development meant that it was shielded from the worst effects of the downturn. As such, by 2009-10 Qatar’s financial sector was once again on a growth trend. According to Qatar National Bank (QNB) data, in 2010 the industry’s loan book grew by 27.6%, from $87bn to $111bn. In 2011 it rose by an additional 26.1%, followed by 14% in 2012, 13.2% in 2013 and 6.7% in 2014 and 15% in 2015.
Perhaps more illustrative of recent credit trends in Qatar is the rate of private sector vs. public sector credit growth. In December 2015 loans to the private sector rose by 19.7% year-on-year, compared to public sector loan growth of 2% in the same period, according to the figures from the QCB. This is not simply a short-term phenomenon. Indeed, from end-December 2010 through end-December 2015 bank loans to private sector entities expanded at a CAGR of 17.2%. This trend can be attributed in large part to private credit incentives put in place under the long-term development plan, Qatar National Vision 2030, which was launched in October 2008. The strategy aims to diversify the economy, with particular focus on boosting private and non-hydrocarbons-related activity.
A number of variables have affected Qatar’s recent credit growth. The steady increase in government withdrawals has had a major impact on the country’s loan-to-deposit ratio. While overall bank deposits rose by 9.6% in 2014 and 8% in 2015, this was primarily the result of private sector activity, according to data from QNB. Indeed, private sector deposits grew by 9.1% year-on-year in December 2015, whereas public sector deposits declined by 8.3% over the same period. This can be attributed to the government working to streamline its ongoing development projects in recent years, in particular by providing financing directly rather than obtaining it via domestic banks. This shift is evident in Qatar’s loan-to-deposit ratio, which grew from 108.2% at the end of December 2014 to 115.1% 12 months later, QCB data shows. As of November 2015 Qatar’s banking sector had the highest loan-to-deposit ratio of all GCC member states, according to S&P.
Given this situation, since late 2014 domestic banks have reported rapidly growing foreign deposits, as the sector works to cover public sector withdrawals. In 2015 non-resident deposits jumped by 80%, according to QCB data. Consequently, over the same period commercial banks’ foreign liabilities rose by 36% from QR227.4bn ($62.4bn) to QR310bn ($85.1bn). Given that the state is not expected to reverse its financing strategy in the immediate future, S&P forecasts a continued uptick in foreign deposits and, as such, foreign liabilities, in the coming years.
Another potential risk to continued credit growth in Qatar is the sectoral mix of the banking sector’s extant loan portfolio. Among Qatari banks rated by S&P as of 2016 – which include QNB, Qatar Islamic Bank, the Commercial Bank of Qatar and Doha Bank – construction and real estate loans accounted for 20% of the total credit portfolio, and was equal to 1. 1-times the institutions’ total equity base. As such, in an early 2016 report the ratings agency noted, “Over the coming quarters, we expect that some acceleration in the formation of non-performing loans will trigger increased credit losses, as banks aim to maintain stable loan loss coverage levels.”
Given Qatar’s strong fiscal position and the banking industry’s solid fundamentals, however, most local players expect any potential credit crunch to be only a minor issue in the coming years. The QCB has taken an active role in shoring up banking stability recently. As of late 2015 Qatari banks had a strong average Tier-1 capital ratio of above 14%. While return on average assets across the sector has declined slightly over the past five years – from 2.7% to 1.9% from 2010 through mid-2015, according to S&P – the sector remains highly profitable, with an efficient cost base and low non-performing loans (less than 2% of total loans as of end-2015).
The Qatar Credit Bureau, which was established in 2011 and has since been extending its coverage, is widely regarded as a key component of banking sector stability. The bureau is working to build up comprehensive credit histories of domestic personal and corporate borrowers, which will allow banks and other financial institutions to better judge a potential customer’s risk profile before issuing a loan. “In 2015 the credit bureau signed a data-sharing agreement with Qatar’s telecommunications service providers, namely Vodafone Qatar and Ooredoo, which is expected to increase the accuracy and value of the bureau’s credit scores,” Abdulla Mohammed Al Naimi, the CEO of Qatar Credit Bureau, told OBG. “In the coming years the institution plans to link up with a handful of additional entities, including the state utilities provider Kahramaa and the insurance sector, all of which will boost transparency and risk management efforts in the credit industry.”
Taking into account Qatar’s many strengths with regard to banking – not to mention the government’s long-term spending plans, which are expected to generate strong economic growth for years to come – most industry players and market observers expect to see continued loan growth in the country for the foreseeable future. QNB forecasts made in late 2015 show the nation’s loan portfolio expanding by around 10.5% over the course of the year, followed by additional growth of 11% in 2016 and 11.5% in 2017, for example, on the back of steadily growing demand for project financing and domestic consumer spending. Additionally, the bank expects to see rising retail deposits in the coming years, with total deposit growth averaging around 10.5% during the 2015-17 period. This expansion is expected to result in a stabilisation of the banking sector’s loan-to-deposit ratio at 110% over the same period.
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