Strategic regulations support positive performance by Qatar's local banks

 

Against a backdrop of sluggish global economic growth and ongoing tensions in the region, Qatar’s banking sector is proving to be strong and resilient, with growth in assets and profits reported by nearly all of the country’s listed institutions at the end of 2019.

Following the conclusion of the country’s first ever banking merger, there were five conventional Qatari commercial banks and five Islamic lenders at the start of 2020, in addition to Qatar Development Bank (QDB), which is a non-profit government-owned institution. The merger in 2019 saw sharia-compliant Barwa Bank combine with International Bank of Qatar, which had been offering conventional services since 1956, to create the country’s third-largest Islamic bank.

In 2020 the Qatar Financial Centre (QFC), an independent legal and regulatory body, reported that the number of companies operating in the onshore financial hub increased by 33% in 2019 to more than 800. In both conventional and Islamic finance, a digital transformation is taking place, with Qatar National Bank (QNB) reporting that in 2019 approximately 97% of all its retail transactions in Qatar took place either remotely or online. Though the Qatar Central Bank (QCB) outlawed cryptocurrency transactions, the government is nevertheless supporting efforts to nurture financial technology (fintech) and entrepreneurs.

History & Oversight

The banking industry in Qatar traces its roots back to 1950, with the opening of Standard Chartered (then known as the Eastern Bank), followed by HSBC in 1954 (then called the British Bank of the Middle East) and Jordan’s Arab Bank in 1957. France’s BNP Paribas, Pakistan’s United Bank, the UAE’s Mashreq Bank and Bank Saderat Iran have all maintained a presence in Doha since the 1970s.

QNB was first established in 1964, while Commercial Bank of Qatar (CBQ) and Doha Bank were established in the 1970s. The two remaining domestic conventional lenders, Ahli Bank and Al Khaliji Bank, were formed in 1983 and 2007, respectively. Qatar Islamic Bank (QIB) broke new ground in 1982, when it was established as the country’s first Islamic finance institution, with Qatar International Islamic Bank (QIIB) joining the fold in 1991, followed by Masraf Al Rayan in 2006. In 1993 the QCB was created and assumed the role and responsibilities of the Qatar Monetary Agency, which had been established in 1973.

Barwa Bank was created in 2008, and Qatar First Bank, which was established in the QFC in 2008 as a sharia-compliant entity, listed on the Qatar Stock Exchange (QSE) in 2016. The government-owned QDB was founded in 1997 to support the development and diversification of the country’s economy through strategic lending and support for homegrown businesses. Since its creation, QDB has been a champion of Qatari small and medium-sized enterprises (SMEs).

In 2006 the QCB issued a directive that differentiated banks in the conventional and Islamic sectors, and in 2011 it ruled that conventional banks should not offer sharia-compliant services through so-called Islamic windows in their branches. The QCB said mingling the two banking regimes would make it difficult to manage risks, keep track of financial reporting and maintain capital adequacy ratios. Additionally, the QCB is responsible for ensuring that the sector contributes to Qatar National Vision 2030. Together with the Qatar Financial Markets Authority and the Qatar Financial Centre Regulatory Authority, the QCB developed the Second Strategic Plan (SSP) for Financial Sector Regulation 2017-22, which aims to create a regulatory framework geared towards inclusive and sustainable growth in addition to promoting innovation and fintech, addressing concerns about cybersecurity and developing human capital to underpin a knowledge-based economy.

Performance

At the halfway point in the SSP’s 2017-22 timeframe, the 2019 financial results for Qatar’s domestic banks revealed a uniform picture of growth and stability, albeit with some entities outperforming others. QNB is far and away the largest of Qatar’s banks, with operations in approximately 31 countries servicing 25m customers across three continents. In 2019 QNB’s assets grew by 10% to QR944.7bn ($259.3bn), while operating income, including its share in the results of its associates, reached QR25.6bn ($7bn), up 4%. Its net profit also grew by 4%, to QR14.4bn ($4bn). QNB’s market capitalisation stood at QR190.2bn ($52.2bn) at the end of 2019 and its capital adequacy ratio at 18.9%. Credit ratings agencies Moody’s, Standard and Poor’s, Fitch and Capital Intelligence gave QNB ratings of “Aa3”, “A”, “A+” and “AA-”, respectively, all with a stable outlook.

QNB provides a broad range of services through its divisions in Qatar. The bank said that its strong performance in 2019 was driven primarily by its support for major projects in the country’s construction, transport, food security and 2022 FIFA World Cup infrastructure sectors. Additionally, Qatar Petroleum’s multibillion-dollar expansion of the North Field’s natural gas infrastructure and the rapid development of the smart city of Lusail both give cause for optimism in the corporate division’s project pipeline for the immediate future. These sentiments were shared by many of the country’s other lenders at investor presentations given at the end of 2019.

The impact of these mega-projects on QNB’s performance was clear; its corporate banking division alone accounted for QR10.5bn ($2.9bn) in revenue in 2019, up from QR9.9bn ($2.7bn) in 2018 and QR9.2bn ($2.5bn) in 2017. QNB’s private banking assets under management in Qatar grew by 28% in 2019. Its international operations accounted for 34.5% of net profit in 2019, at QR4.95bn ($1.36bn), compared to QR5.06bn ($1.39bn) in 2018 and QR4.76bn ($1.31bn) in 2017.

Convential Banks

CBQ saw the highest rate of increase in revenue and net profits in the country in 2019. Its assets grew from QR135bn ($37.1bn) in 2018 to QR148bn ($40.6bn) in 2019, representing a 9.4% rise. Revenue grew by 24%, from QR3.5bn ($961.2m) to QR4.4bn ($1.2bn) over the same period, net profits saw a 21% boost, from QR1.7bn ($466.9m) to QR2bn ($549.3m), and its capital adequacy ratio grew from 15.5% to 16.4%. The bank was given a credit rating of “A3”, “A” and “BBB+” by Moody’s, Fitch and Standard and Poor’s, respectively, in the last three months of 2019. CBQ’s market capitalisation was QR17.9bn ($4.9bn) at the beginning of March 2020.

Ahli Bank had a market capitalisation of QR8.3bn ($2.3bn) and was Qatar’s fifth-largest conventional bank in terms of assets at the end of 2019. Its assets grew from QR40.4bn ($11.1bn) in 2018 to QR44bn ($12.1bn) in December 2019, an increase of 8.7%. Over the same period revenue grew by 0.9%, from QR1.10bn ($302.1m) to QR1.11bn ($304.8m), while profits inched up by 1.5% from QR666m ($182.9m) to QR675m ($185.4m). The bank held a capital adequacy ratio of 16.9% as of September 2019.

Al Khaliji Bank, which had a market capitalisation of QR4.4bn ($1.2bn) at the beginning of March 2020, saw its assets grow by 3.2% from the end of 2018 to the end of 2019, from QR52.1bn ($14.3bn) to QR53.8bn ($14.8bn). Over the same period revenue grew by 3% from QR1.14bn ($313.1m) to QR1.18bn ($324.1m), while net profits increased by 6.2%, from QR608.4m ($167.1m) to QR646.3m ($177.5m). Al Khaliji’s capital adequacy ratio was 19.1% in January 2020.

In September 2019 Doha Bank’s assets had grown to QR106.7bn ($29.3bn) from QR96.1bn ($26.4bn) in December 2018. Its net operating income for the first nine months of 2019 was QR2.1bn ($576.8m) compared to QR2.0bn ($549.3m) for the same period in 2018, with a profit of QR819m ($224.m) compared to QR737m ($202.4m). Its market capitalisation was QR7.4bn ($2bn) at the start of March 2020.

The country’s newest bank, Qatar First Bank, which listed on the QSE in 2016, had not yet published its full-year results as of March 2020. However, its performance in the first nine months of 2019 showed its assets fell from QR3.3bn ($906.3m) to QR2.9bn. Comparing the first three quarters of 2019 to the same period in 2018, net losses improved from QR444.5m ($122.1m) to QR303.6m ($83.4m).

Islamic Banks

The two largest Islamic lenders by assets and market capitalisation at the start of 2020 were QIB – the country’s second-largest lender, with a market capitalisation of QR39bn ($11.7bn) and assets of QR164bn ($45bn), up 6.7% from QR153bn ($42bn) at the end of 2018 – and Masraf Al Rayan, which had a market capitalisation of QR30.6bn ($8.4bn) and assets of QR106bn ($29.1bn), up 9.4% on 2018. In 2019 QIB saw its revenue increase by 12.4%, from QR6.9bn ($1.9bn) to QR7.7bn ($2.1bn), and net profits grow by 13.5%, from QR2.6bn ($714.1m) to QR3bn ($824m). Over the same period Masraf Al Rayan’s revenue increased by 7.1%, from QR4.9bn ($1.3bn) to QR5.2bn ($1.4bn), and its net profits grew by 2.3%, from QR2.14bn ($587.8m) to QR2.19bn ($601.5m).

QIIB, with a market capitalisation of QR13.6bn ($3.7bn) and assets of QR56.8bn ($15.6bn) at the end of 2019, is set to be overtaken by the newly merged Barwa Bank, which, as of March 2020 had not yet released its consolidated full-year results. Barwa Bank had estimated combined assets of QR80bn ($22bn). QIIB had a good year in 2019, seeing its revenue climb by 14.6%, from QR2.1bn ($576.8m) to QR2.4bn ($65.2m), and net profits increase by 5.1%, from QR882.1m ($242.3m) to QR927m ($254.6m).

Financial Inclusion

In its 2018 annual report, the QCB, citing the IMF, highlights the role of better access to finance in supporting the growth of SMEs and the potential benefits of such firms for the wider economy. The IMF calculated that for each percentage-point increase in financial inclusion in advanced economies, economic growth can be boosted by as much as 0.9%, and in this respect, Qatar has been performing well. “A SME contribution to GDP of 15-20% is considerable for a small and young economy such as Qatar’s,” Fahad Al Khalifa, CEO of Al Khaliji Bank, told OBG. “This is a big achievement, especially considering SME initiatives are also relatively new.”

While many of Qatar’s lenders offer services to small businesses, the QDB has overall responsibility for nurturing the SMEs sector. The QCB notes that QDB’s single window initiative, allowing investors access to finance facilities to own a factory within 72 hours, has made a significant contribution to the country’s successful response to the blockade. Data from the QCB shows a 0.7% increase in bank accounts opened by small businesses and individuals in 2017, which grew by 0.9% in 2018, while the credit issued to holders of these accounts grew by 4.2% in 2017 and 3.2% in 2018.

Lending & Deposits Growth

According to an analysis of banks listed on the QSE by QIB, from 2015 to the third quarter of 2019 financing grew at a compound annual growth rate (CAGR) of 10.3% to reach a combined value of QR1.08trn ($296.6bn), while deposits over the same period grew at a CAGR of 13.8% to reach a combined total of QR1.05trn ($288.4bn). QIB points out that banks listed on the QSE have been operating with strong government support since the global financial crisis of 2007-08. In 2008 the Qatar Investment Authority offered to acquire up to a 20% stake in listed banks. Then in March 2009 the government offered to purchase the domestic equity portfolios of seven of the nine QSE-listed banks, and in June 2009 it purchased approximately $2.7bn worth of real estate financing and other exposures from Qatari banks. Between 2010 and 2011 the government issued some $16.4bn worth of sukuk (Islamic bonds) to absorb excess local liquidity. Government funding in 2017 further supported the local banking system after a number of countries, prompted by the blockade, withdrew their funds.

An analysis of loan portfolios of Qatar’s domestic banks in 2019 shows some common threads. Although QNB is a multinational bank, it detailed patterns of lending and deposits in Qatar in its end-of-year presentation for 2019. These showed its corporate division accounted for 90% of loans and 77% of deposits across the group. Its Qatar market accounted for 73.5% of all loans in 2019, with loans to the government and its agencies accounting for 34.7%, followed by services and commerce at 36.9%; and real estate and contracting, and individuals each receiving 10.7%.

Total loans in the Qatar market grew from $107.6bn in 2017 to $120.6bn in 2018 and $137bn in 2019. CBQ noted its strategy was to reshape its loan book in 2019 by diversifying risk and reducing real estate exposure, but increasing loans to the government. From 2018 to 2019 its real estate loans shrank from 26% to 21%, while the portion loaned to government increased from 9% to 17%. CBQ’s consolidated loan book value was QR88bn ($24.2bn) at year-end 2019, up 4% from the previous year. Corporate customers received 79% of CBQ’s loans in 2019, with retail customers accounting for the remaining 21%. Its non-performing loan (NPL) ratio was 4.9% on a 90-day basis.

At the end of 2019 Doha Bank’s total loan book was QR65.8bn ($18.1bn), with corporate loans accounting for 77.5%, while 11.9% went to retail customers and 10.6% to the government sector. The real estate sector was the largest recipient of loans (25.8%) in 2019. Doha Bank’s loans to the real estate sector grew at a CAGR of 14% from 2009 to December 2019, when they were valued at QR148.9bn ($40.9bn). The bank’s NPL analysis showed real estate had the lowest rate, at 0.2%, compared to 4.7% for retail customers and 7.9% for corporate clients as a whole. The higher NPL scores were affected by the bank’s operations in the GCC, and the rate in Qatar remained low, at 3.3%. Based on central bank data, Doha Bank estimated its share of the overall QR956bn ($262.6bn) loan market in Qatar to be 6.7%, with its share of real estate and trade loans at 11.6% and 11.3%, respectively, and its share of the QR302bn ($83bn) government market at 1.9%.

Ahli Bank saw its loans and deposits grow by a CAGR of 6% and 5%, respectively, from 2015 to 2019, and the combined value of its loan book reached QR31.6bn ($8.7bn) at the end of the period. Al Khaliji Bank, which has a presence in the UAE and France as well as in Qatar, saw its total loans decline from QR35.1bn ($9.6bn) in 2017 to QR31.6bn ($8.7bn) in 2018 and QR30.8bn ($8.5bn) in 2019. While its share of loans to real estate remained steady, at 27%, the share of loans to the government grew from 14% to 17% and loans to trade declined from 12% to 9% between year-end 2018 and year-end 2019. QIB is the country’s second-largest lender. It saw its financing activities grow at a CAGR of 6.8% from 2015 to 2019. At the end of the period its loan book was worth QR113.8bn ($31.3bn) and its largest sectors were personal (22%), real estate (21%), and government and related institutions (15%).

Masraf Al Rayan, the country’s second-largest Islamic bank, saw a 3.2% increase in financing activities in 2019, up from QR72.5bn ($19.9bn) in 2018 to QR74.8bn ($20.5bn). QIIB’s financing profile saw a shift in 2019, with the proportion of consumer financing declining from 41% to 31%, and real estate exposure also falling, from 29% to 20%, while government financing activities increased considerably, from 8% to 25% of its financing portfolio.

Deposit Growth

QNB reports that deposits in the local market grew from QR325bn ($89.3bn) in 2017 to QR350bn ($96.1bn) in 2018 and QR370bn ($101.6bn) in 2019. CBQ’s deposits grew by 6.3% to QR76.3bn ($21bn) in 2019, with government and semi-government entities accounting for 25% of the mix, corporate for 27% and individuals for 31%. Doha Bank’s deposits were valued at QR58.5bn ($16.1bn) in September 2019, with the government sector accounting for 41%, and corporate clients and individuals making up 35.9% and 20.1%, respectively.

Al Khaliji Bank’s deposit profile by sector remained stable, with a slight decline in the share of government deposits, from 48% to 45%, while the proportion of personal deposits grew from 8% to 10%. QIB saw deposits grow at a CAGR of 5.1% between 2015 and 2019 to QR111.6bn ($30.7bn). Of this total, 72% came from fixed deposits, 15% from call and savings accounts, and 13% from current accounts. Mashraf Al Rayan’s customer deposits increased by 6.6% in 2019, up from QR61.6bn ($17bn) to QR65.6bn ($18bn). QIIB saw its total growth in customer deposits increase by 6.9% in the first six months of 2019. The newly merged Barwa Bank, which is not listed, had not released comparative data for 2018 and 2019 on financing and customer deposits as of March 2020.

Qatar Financial Centre

The QFC saw a 33% increase in members in 2019, with almost 200 new firms registering, bringing the total number of firms able to operate out of the centre to 816 as of December 2019. The QFC has the goal of hosting 1000 firms by 2022, providing a gateway to the Qatari market for international firms working in tax, investment, IT, fintech, and financial and non-financial services. The centre’s CEO, Yousuf Mohamed Al Jaida, welcomed the growth in activity. “The QFC platform has made substantial progress towards its core mandate of attracting foreign direct investment to Qatar and promoting economic diversification,” he said in a statement published on the QFC’s website in January 2020.

Outlook

With a strong pipeline of major development project financing over the short term, against a backdrop of strong and sustained growth in recent years, Qatar’s banking sector can anticipate profits and success well into the future. The merger involving one of its oldest conventional lenders to form the country’s third-largest Islamic bank suggests a considerable appetite for sharia-compliant facilities.

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