With liquidity levels strong and earnings solid, international ratings agencies and the Qatar Stock Exchange (QSE) have expressed confidence in the financial stability of the country’s banks, though external pressures remain.
Qatar’s eight-largest banks posted combined net profits of QR12bn ($3.3bn) for the first half of the year, a 10.6% year-on-year (y-o-y) increase on 2017, according to data released by the QSE in late July.
Lenders in both the conventional and sharia-compliant segments of the industry posted solid gains. Qatar National Bank, the largest commercial lender, recorded an increase in net profits of 6.67% y-o-y to QR6.65bn ($1.8bn), while Qatar Islamic Bank, the largest Islamic bank, posted a 13.8% jump in net profits, reaching a six-month total of QR1.33bn ($365m).
The banks cited a combination of asset growth, improved returns on investment and earnings from lending as key factors behind the profit increase. They also noted a slowing of activity in some key sectors, including hospitality and real estate, but said that this was balanced out by state investments in infrastructure and other projects.
Total domestic credit expanded by 4.4% in the 12 months ending May 31, according to data issued by the Qatar Central Bank (QCB), with private sector credit rising by an even sharper 10.7% y-o-y.
Resilient outlook despite external pressures
The underlying strength of the banking sector was highlighted in a survey conducted by credit agency Moody’s, which affirmed the long-term deposit and issuer ratings of all 10 Qatari banks it reports on.
“Qatar’s banks have managed to maintain strong asset quality and capital buffers, and their liquidity buffers remain solid,” Moody’s said in a statement released in mid-July.
It also revised its outlook on the long-term deposit, issuer and senior unsecured debt ratings from negative to stable. This shift was due to the banks’ continued high levels of liquidity buffers and renewed confidence in the capacity of the state to support the sector as required.
The revision of the sector’s outlook to stable also reverses the negative position Moody’s took last August, when it cited concerns over the potential for an increase in non-performing loan (NPL) ratios as a result of regional tensions.
Though resilient, the banking sector is having to contend with pressure from the ongoing economic blockade by some Gulf states, according to a new report from ratings agency Standard and Poor’s (S&P).
Released in late July, the report on NPL levels across the GCC said that while the regional situation had deteriorated only marginally over the past 12 months, it could weigh on local bank assets as a result of pressure on the real estate and hospitality sectors.
S&P also reaffirmed Qatar’s long- and short-term foreign and local currency sovereign ratings at “AA-/A-1+”, respectively, saying it expected the authorities to continue to actively manage the blockade while preserving Qatar’s core rating strengths, including support for the financial sector.
Outflows manageable, offset by rise in energy prices and investment
The report noted that while there had been significant outflows of non-resident capital from Qatari banks over the past year, these had been adequately managed, having been more than offset by liquidity injections from the QCB and public sector deposits.
Though there may be further non-resident capital outflows in the future, S&P said any such outward movements of funds would be manageable.
The proven ability of the financial system to respond to adverse pressures should help the banking sector post even better results in the short to medium term, according to Omar Bouhadiba, managing director of the International Bank of Qatar.
“While liquidity and bank deposits were the initial concern, the situation was dealt with very well from a regulatory standpoint, and these quickly came back to normal levels,” he told OBG. “Based on the current indicators the sector is quite healthy, and we expect 2018 and 2019 to be relatively good years for the banking sector.”
Some business leaders remain optimistic that a favourable macroeconomic outlook will have a positive effect on the banks due to higher levels of investment in certain sectors.
“Qatar's GDP growth will benefit from strengthening market conditions, particularly from the continued recovery in oil and gas prices.” Joseph Abraham, GCEO of Commercial Bank, told OBG. “New investment opportunities, in a new gas production capacity for instance, will certainly help the banking sector and provide a big stimulus in the coming months.”