Mergers on the cards as the cost of borrowing rises and growth decelerates among lenders in Qatar


With 10 domestic commercial banks and a number of financial institutions operating out of the Qatar Financial Centre (QFC), the Gulf nation is emerging as a financial services centre for the region. However, with banks’ cost of borrowing rising and the buoyant growth trend likely to approach a natural plateau in the next two to three years, there are signs that the market could be about to embark on a wave of consolidation. The potential benefits of such a trend are varied: from improved economies of scale to the additional clout required for regional and overseas expansion. Yet there are also challenges to be overcome in any potential merger, from regulatory approval to boardroom politics, and in some cases the need to convert internal operations and loan books to become sharia compliant.

Coming Together

Recent mergers and acquisitions (M&A) activity picked up in the region after July 2016, when the boards of two of the emirate’s largest banks in neighbouring Abu Dhabi agreed to join together to create what will be the Middle East’s biggest lender. A unanimous vote from the boards of both National Bank of Abu Dhabi and First Gulf Bank will lead to a merged entity with a market capitalisation of $29bn and total assets of $175bn. According to international press reports in November 2016, further consolidation within the UAE’s financial sector is also under consideration, with a possible merger between the conventional banks Abu Dhabi Commercial Bank and Union National Bank, as well as the Islamic banks of Abu Dhabi Islamic Bank and Alhilal Bank. The UAE’s financial services industry currently comprises around 50 different institutions serving a market of around 9m.

The news from Abu Dhabi was followed in December 2016 by an announcement from three Qatari banks – Masraf Al Rayan (MAR), Barwa Bank and International Bank of Qatar (IBQ) – that they had begun talks for a potential merger, which would combine assets worth more than QR160bn ($43.9bn), and place the new entity second overall within the domestic market at current asset levels. An eventual merger, however, would also require approval from the regulatory authorities, including the Qatar Central Bank, the Qatar Financial Markets Authority and shareholders.

In the case of Barwa, the government maintains a majority holding of 52.9% divided among two government funds and Qatar Holding. Qatar Holding is also the largest shareholder in MAR, with further government holdings in the bank bringing the state’s total to 27.4%. Meanwhile IBQ includes senior members of the royal family among its shareholders.

Challenges & Benefits

While the proposed merger is thought to carry high-level backing, it will not be an entirely straightforward process. Two of the three banks – MAR and Barwa – are sharia-compliant institutions, meaning that should it merge with them, IBQ will be required to convert its operations and assets to sharia-compliant standards. Should the details be worked out, all three parties stand to benefit. MAR, whose operations are currently focussed on government and government-related entity activities, would obtain greater exposure in both small and medium-sized enterprises through Barwa and high-net-worth retail segments via IBQ. For their parts, Barwa and IBQ – both currently unlisted – would gain greater access to liquidity.

The question among many within the sector is whether the proposed merger will prompt further consolidation in the market. In this respect, the auguries are mixed. On the one hand, (by some measures) Qatar’s financial services sector could be considered overbanked. Overall, there are 10 commercial banks servicing a market with a population of only 2.5m people, and many of these are blue-collar, expatriate workers who remit the majority of their income to their home countries. Even with GDP per capita among the highest in the world, there is a natural limit to the number of financial institutions that can be sustained purely through domestic demand. On the other hand, there are certain features of Qatar’s market that favour a degree of breadth. In particular, many of Qatar’s high-net-worth individuals prefer to spread their deposits across a number of different banks.

A deeper look into the banking sector’s structure unearths a similarly mixed picture. When measured by total assets, the banking industry is both top heavy and has a very long tail. Qatar National Bank (QNB), the largest institute by assets, accounts for 51.9% of the total with QR720bn ($197.7bn). There is then a long gap to second place, with Qatar Islamic Bank (QIB) – the market’s largest Islamic bank – accounting for 10.1% of total assets, holding QR139.8bn ($38.4bn). At the other end of the scale, the five smallest banks represent a combined total of 16.1% of assets, with percentages varying between 2.6% for IBQ and 4.4% for Al Khaliji Bank.

Bigger Picture 

While these figures might suggest a market ripe for consolidation, in reality the picture is more complex. Asset growth across the sector is varied, and not strongly correlated with bank size. The largest growth in 2016 was recorded by QNB, which expanded its asset base by 34%, while the second-fastest growing was the ninth-ranked Ahlibank, whose assets rose by 18.2%.

Likewise, cost-to-income ratios (CIR) – a measure of a bank’s operating efficiency – do not suggest that Qatar’s smaller banks are any less efficient at managing their capital than their larger colleagues. The most efficient institute in the sector according to this measure is the fourth-largest bank, MAR, with a CIR of only 18.1%. By contrast, Commercial Bank of Qatar (CBQ), which is currently ranked third, has the highest CIR in the sector at 45%. Indeed, when comparing the unweighted average CIR for Qatar’s top and bottom five banks by assets, there is essentially no difference in operational efficiency. The average across the five largest banks is 32%, while the average for the five smallest is 32.3%.

Within the wider GCC and across emerging markets globally, these are highly competitive figures. Average unweighted CIR across the whole of Qatar’s banking sector currently stands at 32.1%. This reflects a marginal decline in efficiency since 2016, with KPMG figures from April that same year standing at 31.7%. However, as noted by KPMG at the time, Qatari banks’ CIR figures are the lowest in the GCC region, suggesting the sector remains competitive in terms of efficiency.

The Next Step

While there is little evidence that Qatar’s financial sector is overly inflated, consolidation may still prove useful in the search for economies of scale to fund growth. Previously, double-digit domestic growth in both deposits and overall assets meant local banks had little incentive to look overseas for expansion. More recently though, growth has slowed to single-digit figures, and profits for many banks have been stagnant. With organic demand expected to level off within the next two to three years, it makes sense for Qatar’s banks to expand into new markets. A number of larger banks – including QNB, QIB and MAR – have already made headway in overseas expansion, particularly in European and other Middle Eastern markets. For smaller banks, however, the economies of scale provided by merging would make such expansion more viable.

The merger between MAR, Barwa and IBQ is not the first time consolidation has been suggested for Qatar’s banking sector; a previous proposed merger between Al Khaliji and IBQ fell through in 2011 after more than a year of talks. There are a number of potential barriers to consolidation: not only will any merged entity require the backing of boards, shareholders and regulators, there is also the question of broader market conditions to consider.

For instance, the tightening of liquidity within the sector in 2016 made consolidation more appealing, particularly for Qatar’s smaller banks. Yet an easing of liquidity in 2017 might see the case for consolidation return to the back burner. Equally, the incidence of non-performing loans has been rising over the past year among certain banks, which could prove a barrier to mergers. “Overall, Qatar’s growth is sustainable. New regulations designed to protect consumers, coupled with changing dynamics in the global markets, including the commodity markets, have forced banks to look at M&As,” Raghavan Seetharaman, CEO of Doha Bank, told OBG. “If this momentum continues then we may not need so many banks in Qatar. We could see further consolidation, either organically or inorganically.”

The ultimate spur to consolidation, however, could be increased activity elsewhere. If a wave of consolidation across the GCC begins to produce banks that could challenge the expansion of Qatari lenders, then the benefits of merging may prove irresistible.


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The Report: Qatar 2017

Banking chapter from The Report: Qatar 2017

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