International financial institutions are giving Qatar's local banks cautious nods of approval based on newly released results for 2003 - which was a third straight year of success for the sector. With oil prices high and the country's gas revenues also on the up, the banks now look set to continue seeing boom times for several years to come. But the question remains, can they use the current period of prosperity to fortify themselves for long-term success?
Total assets held by the country's seven fully licensed local commercial banks rose by 18.5% in 2003, to an even QR66bn, while their loans and advances grew by 21.7% to QR40bn. Net profits rose by 27.6% to QR1.42bn, compared to QR1.11bn in 2002, and as local banks concentrated on improving their retail services, customer deposits rose by 12.3% to reach QR48.9bn.
During the same period, shareholders' equity in the banks increased by 24.1%, to QR9.5bn, mirroring the upward trajectory seen in the overall economy as well as the stock market throughout the year.
Yet Qatar's banks have seen boom times before, only to then find themselves caught unprepared for downturns. Experts say natural gas - which is rapidly overtaking oil as the country's top revenue generator - will arguably be less cyclical, but the basic shape of the banking sector has yet to change.
"The Qatari banking system still suffers from low liquidity and a lack of diversification," points out Anouar Hassoune, a Paris-based banking analyst for ratings agency Standard and Poor's (S&P).
Other key performance ratios also attested to a successful year for local banks in 2003, with a return on average assets of 2.3% and a return on average shareholders' equity of 16.5%. The ratio of shareholders' equity to total bank assets was 14.4% as of end-2003, while loans and advances added up to 81.6% of customer deposits at the banks.
Partly thanks to government encouragement, local banks have become involved in project financing, giving them valuable experience that could, for some of them, help with regional expansion. But for banks that are small even by regional standards, investments in the home market generate more than enough activity these days and, from some perspectives, carry lower risks than going abroad.
Provisioning efforts over the past three years have, meanwhile, put local banks in a position to realise profits and pay handsome shareholder dividends. Although net profits at most commercial banks dipped significantly in 2000, total assets and shareholders equity have climbed steadily at most banks throughout the past five years.
The 50% state-owned Qatar National Bank (QNB), the dominant commercial bank in the market, reported net profits in 2003 of QR641.1m, up from QR580.2m in 2002. Its assets at end-2003 were 34.79bn, with shareholders' equity amounting to QR5.61bn. Customer deposits came to QR24.1bn, up from QR23.6bn the year before. Growth was expected to continue as the bank strengthened its retail brand with a new logo, launched in February 2004.
As over the past five years, Doha Bank kept its grip on second place in terms of assets, reporting QR9.06bn compared to QR7.41bn the year before, while Commercial Bank of Qatar (Commercialbank) came in a close third at QR8.79bn, up from QR6.14bn. But Commercialbank's strength was evident in its net profit of QR248.0m, up from just QR158.8m in 2002, compared to a 2003 figure for Doha Bank of QR214.6m, up from QR158.8m. Commercialbank also surged ahead in shareholder equity (QR1.41bn, as opposed to Doha Bank's QR1.12bn), having fallen slightly behind Doha Bank in this regard in 2002.
The country's two Islamic banks also had a good year, with assets at Qatar Islamic Bank (QIB) amounting to QR5.6bn, compared to QR5.13bn the year before. Qatar International Islamic Bank (QIIB) grew from QR3.24bn to QR3.9bn.
As for the smaller conventional banks, al-Ahli Bank of Qatar, which was gutted by bad loans four years ago, has returned to profitability, resulting in asset growth from QR2.16bn to QR2.55bn in 2003, while the recently licensed Grindlays Qatar, still in its formative period, grew from QR1.14bn to QR1.34bn.
After three years of building up provisions, the Qatari banking system enjoys the lowest consolidated ratio of non-performing loans (NPLs) to total gross loans among Gulf countries. NPLs reportedly accounted for only 6% of banks' total lending as of the end of 2002. According to Hassoune, the S&P analyst, "problem loans" probably continue to be "somewhat understated," although Qatar's improvement in this regard has been striking.
During the 1990s, local banks engaged in extensive margin lending, a practice over which the central bank exercised little control at the time. Al-Ahli, apparently, overextended itself more than most. Along with high-risk margin lending to stock-market speculators, the bank had suffered from "shareholder interference" in day-to-day decisions, Andy Iannou, a Cyprus-based analyst for the rating agency Capital Intelligence, told the UAE press. In 2000, the bank's shaky loan portfolio - combined with a slump in oil prices that also hit more reliable customers - resulted in losses of more than QR100m.
Although it had sufficient reserves to cover this loss, its net worth declined by a shocking 35%. "If the central bank had failed to intervene, al-Ahli Bank might have gone into receivership," Iannou added.
With the Qatar Central Bank (QCB) anxious to restore the bank's depleted capital, several potential deals with foreign banks have been discussed. Plans for a 40% sale to the Bahrain-based al-Ahli United Bank now appear to be firm, although the transaction must be approved by the QCB and the Ministry of Economy and Commerce before being presented to shareholders, who must in turn approve it by a 75% majority.
But lending opportunities for the banks, as well as the liquidity of the whole system, are still bound to fluctuate with international oil prices. Deposits in Qatar are more closely tied to oil prices than in other Gulf countries, whereas credit growth rates have been more volatile.
"Asset-liability management has not reached the same level of maturity in Qatar as in some other neighbouring financial systems," Hassoune noted.
The undesirable oil-price linkage could diminish with Qatar's current transition from being a second-tier oil-producing state to a market-making gas producer. In the meantime, the country has entered 2004 on a wave of high oil prices that is sure to be reflected in the banks' profit statements at the end of the year.
Ratings agencies have been pleased to see the banks building up their loan-default provisions, while the QCB's swift intervention to prevent a run on al-Ahli Bank in 2000 has bolstered confidence in the sector as a whole. Yet the central problem - Qatari banks' excessive exposure to the state - remains, even with the transition to gas and downstream industries.
Qatar's entire economy is dependent not only on oil and gas revenues, but also on a state-dominated petroleum establishment. So, even as local banks make important strides in the area of project financing, the largest deals in which they can participate are still for natural gas or downstream industrial ventures involving Qatar Petroleum (QP) as majority owner.
"The banks' main challenges are to increase diversification and reduce their reliance on the state," Hassoune said. "The banking system faces serious concentration risks."
Low diversity in the wider economy makes banking opportunities all the more limited. The government is the largest borrower from the Qatari banking system, a situation that is unlikely to change anytime soon. Outside of oil and gas, the government is trying to allow a larger role for the private sector, but given the concentration of investments in construction and retailing, private sector firms also rise and fall with oil prices.
Qatari banks also show a high degree of dependence on consumer lending, which accounted for 27% of total bank loans at the end of 2002. The corporate credit segment is narrow, given the prevalence of a handful of merchant families. The environment of limited competition in which the banks operate on the one hand restricts their growth opportunities, but on the other hand it also means that creditors can be assured of some predictability in terms of banks' profits, as long as sound lending practices are observed.
So far, margins have remained high, as competition on the credit side is still limited. According to Hassoune, the sustained demand for credit in the local market reflects the low savings rate of Qatar's young population as well as the high borrowing needs of the public sector. Qatari banks' financial profile is therefore "satisfactory", he said, "with good capitalisation, high interest margins and low expense levels".
Ultimately, Qatar's banks, like the country, are perched atop a massive well of gas reserves. "QNB, in particular, has strong ties with the government and plays a central role in the economy," Hassoune added. "Hence, support from the authorities for QNB would undoubtedly be high should the need arise."
Moreover, since the number of banks is small, failure of any local bank could have a significant impact on the financial system. Additionally, the importance of the local families that hold shares in banks implies a strong likelihood that any bank facing serious difficulties would be eventually rescued.
That said, a weak legal environment and low disclosure still add risks to the system, as far as international ratings agencies are concerned.
"Supervision certainly needs to be further enhanced to reach the same level as the best regional supervisors," Hassoune said. "In particular, supervision needs to move to a more proactive risk-based approach."