Strong results: A diversifying economy and an array of large projects support lenders’ asset expansion

Having shown considerable resilience in the face of the global financial crisis, Qatar’s banks now stand to benefit from the nation’s anticipated economic growth. A pipeline of large-scale projects and the government’s development strategy, which is set to use the country’s hydrocarbons revenues to bring about economic diversification, both promise to supply lenders with plentiful opportunities for asset expansion. Furthermore, Qatar’s hosting of the 2022 FIFA World Cup has helped expedite some initiatives.

The highly capitalised banks which operate in the domestic market are also well positioned to expand their brands internationally – a strategic goal considered necessary in view of the limited size of the home market. Moves into foreign markets have already become an important theme in 2013, and will likely remain so going forward as lenders seek to increase their international footprints. Meanwhile, the nation’s central bank continues to assume more responsibilities over the financial sector and, through regulatory reform, has taken some significant steps towards increasing the system’s stability.

Market Structure

The Qatari banking sector is one of the most competitive in the region, with a total of 18 banks licensed by the Qatar Central Bank (QCB) serving over 2m inhabitants. Of these institutions, 11 are locally owned and seven are subsidiaries or branches of foreign lenders. Additionally, more than 20 licensed banks operate from within the distinct regulatory environment of the Qatar Financial Centre (QFC), although their activity is generally conducted through relatively small representative offices – QInvest, a sharia-compliant investment bank licensed in 2007 with an authorised capital of $1bn being one of a small number of exceptions.

Qatar’s banks must therefore compete with major global financial institutions such as HSBC, Standard Chartered and BNP Paribas, as well as regional operators such as Jordan’s Arab Bank and Iran's Bank Saderat. However, foreign players play a relatively small role in the sector, accounting for 4.1% of total assets as of December 2013, with the domestic market dominated by five local lenders which between them accounted for 84.1% of total sector assets.

Qatar National Bank was established in 1964 as the first locally owned commercial bank, and is 50% owned by the government via the Qatar Investment Authority (QIA). With assets of $121.5bn as of December 2013, it is by far the largest player in the market, accounting for 48.7% of total banking sector assets and more than 58.2% of aggregated loans and advances. By comparison, the assets of the second-largest bank in the sector, Commercial Bank of Qatar, were less than a third of the size of the market leader, at $31bn, granting it a 12.3% market share.

A notable feature of the sector is the role played by Islamic banks – as two banks of Qatar’s “big five” are fully sharia compliant: Qatar Islamic Bank (QIB) was established in 1982 and as of December 2013 accounted for 8.5% of total assets, while Masraf Al Rayan is a newcomer to the market, opening its doors in 2006 and holding 7.3% of total banking sector assets. The sector has a total of four Islamic banks (see Islamic Financial Services chapter), but rounding out the top five in terms of asset size is another conventional operator, Doha Bank, established in 1978, also with 7.3% of total market assets.

The competitive nature of the local sector has prompted most of the larger players to look beyond Qatar’s borders for growth prospects. Some, like QNB, already have significant international operations, whilst others have made their first foreign acquisitions over the past year (see analysis).

Government Support

Another notable feature of the Qatari banking sector is the high degree of government support it enjoys, usually characterised as “highly supportive” by ratings agencies such as Moody’s, Fitch, and Standard & Poor’s (S&P).

Most of the boards of the local lenders contain state officials or members of merchant families, and the government frequently maintains an ownership stake through the QIA or other quasi-governmental bodies. State support for the sector was most clearly demonstrated in recent years by the government’s reaction to the 2008-09 global financial crisis, which saw it purchase potentially troubled equity and real estate portfolios, and utilise the QIA to increase the capital of local banks. In the first quarter of 2011 the government, through the QIA, bought another 10% stake in domestic banks in order to strengthen their capital bases, this time with a view to enabling them to meet the increased demand for credit in the wake of the nation’s successful bid to host the 2022 FIFA World Cup. Government support of this nature has played a part in the domestic banks’ ability to secure high credit ratings from all three major agencies, Fitch, Moody’s and S&P, which in turn has enabled them to obtain cheap funding with an average yield of 2% and an average maturity of three years.

Sector Regulation

Banking in Qatar is regulated according to two distinct regimes. Banks operating in the domestic sector, including the big five, are directly supervised by the QCB. Banks licensed by the QFC, meanwhile, are subject to the rules and standards of the QFC Regulatory Authority (QFCRA), established in 2005, the regime of which is based on common law. While banks that operate from the QFC cannot engage in retail banking or finance business, some lenders operating under the QCB’s jurisdiction have interests which require them to work with the QFCRA, such as QIB’s 49% ownership of QI nvest, a QFC-based investment bank. The Qatar Financial Markets Authority (QFMA) is a third source of regulation that banks must be mindful of when undertaking some activities. For example, banks wishing to engage in brokerage activities on the Qatar Exchange, which they have been entitled to do since 2010, must obtain a licence from the QFMA to do so. In regard to the QCB, two major regulatory themes have emerged over recent years: the separation of conventional and Islamic banking, and a tightening of personal lending criteria.

In February 2011 the regulator instructed conventional banks to cease taking deposits through their Islamic windows and to close their sharia-compliant operations by the end of the year. By early 2012, Islamic banking in Qatar was the exclusive preserve of the four fully sharia-compliant lenders, which stood to gain from the regulatory move in terms of customers, assets and physical infrastructure. The resulting shift in the customer base of conventional and Islamic banks has been one of the most significant developments of the past year. In some cases Islamic banks acquired entire sharia-compliant portfolios from conventional lenders, such as the sale of International Bank of Qatar’s retail portfolio to Barwa Bank and its corporate portfolio to QIB. However, in many cases conventional banks have been successful in transferring Islamic banking customers to conventional accounts.

For example, at QNB, the impact of the change was relatively limited. QNB Al Islami, the bank’s sharia-compliant option, accounted for around 14% of the group’s asset base. However, because many of the affected customers were corporate, they were willing to change to conventional accounts after the change and subsequently stayed with the bank.

In April 2011 the QCB introduced new limits on loans and interest charges on personal lending. The move followed a previous credit-tightening exercise in 2008, when a limit of QR2.5m ($684,750) was imposed on the amount of credit that could be extended to a Qatari national. Under the new regime, the upper limit for nationals has been changed to QR2m ($547,800), while expatriates are limited to loans of QR400,000 ($109,560) or less.

Additionally, maximum payment periods have been established, 72 months for nationals and 48 months for expatriates, while the ratio of monthly repayment to monthly salary (or the equated monthly instalment) was fixed at 75% for nationals and 50% for foreigners. Finally, the QCB introduced a maximum rate of interest for all personal lending of the QCB lending rate plus 1.5 percentage points and placed limits on credit card withdrawals of double the net total salary, with a maximum interest rate of 1% per month, and 0.25% on arrears of credit card debts.

Towards Unified Regulation

As the sector develops, so too does the regulatory framework by which it is governed. QCB was first established by the QCB Law, or Emiri Decree No. 15 of 1993, and mandated to formulate monetary, banking and credit policies so as to achieve the financial and economic objectives of the government. This law was then modified by the promulgation of Decree 33 of 2006, which gave the QCB greater power over banks, such as allowing it to set reserve fund requirements and regulate the opening of branches abroad, as well as granting it the ability to levy fines on banks and financial institutions in breach of its codes.

More recently, the powers of the QCB have been extended. Law No. 13 of 2012 replaces the 2006 legislation and establishes the QCB as the supreme authority for all financial service providers in Qatar, including banks, Islamic financial services institutions, insurance and reinsurance companies, investment and finance firms, exchange houses, and companies licensed by the QFC and the QFMA.

While the QFMA will remain in place, and the QFC companies will still be directly supervised by the QFCRA, the positioning of the QCB as the apex institution for the regulation of the financial sector has been widely interpreted as a step towards creating a single financial regulatory body. In the shorter term, the new law has already brought about a greater degree of oversight to the banking system as a whole through the establishment of a Financial Stability and Risk Control Committee.

The purpose of the new body’s creation is to minimise regulatory overlap and remove opportunities for regulatory arbitrage, and to these ends it includes the heads of the three financial regulatory agencies, with the governor of the QCB acting as chairman.

Strong Performance

Despite a shifting regulatory backdrop that has compelled Qatar’s banks to revisit their business models, the performance of the sector has remained strong over recent years. While markets in many countries around the world were static or even contracting in 2009 and 2010, the Qatar banking sector continued to expand steadily: total assets of commercial banks grew by 16.4% in 2009, and by 21.3% in 2010 to reach QR567.5bn ($155.4bn), according to QCB data. Looking at the longer trend, asset growth has remained constant since 2007, climbing steadily y-o-y to result in a 2007-13 compound annual growth rate of 25.3%.

Total banking assets to GDP increased from 97% in 2008 to 117% in 2012, a comparatively low level compared to the UK (which stands at around 370%), but one that reflects a conservative banking environment based on quality assets. In 2012 non-performing loans were estimated at just 2% of total loans, according to QNB. Capital adequacy ratios (CAR) for Qatar’s banks, meanwhile, averaged 19% in 2012, well in excess of the minimum CAR requirement set by the QCB of 10%, which is itself considered to be a conservative standard. Despite the introduction of tighter personal lending conditions, this buoyant performance has been sustained. In 2012, Qatar had the highest growth rate of banking assets in the GCC, at 18%, and this trend continued into the following year.

In the second quarter of 2013 Qatar’s banks registered the highest loan-book growth in the GCC, posting a 23.1% expansion over the previous year, a result that has been ascribed to higher public sector spending in the run-up to the FIFA World Cup in 2022. Profitability also rose by 13.4% y-o-y, underpinned by QNB’s 23% net profit expansion for the period. Drilling into the profitability results, non-interest income increased by 29.4% y-o-y across the sector. Within this, the fee income results of Qatar’s banks were impressive, leading the region with an increase of 43.3% y-o-y.

Qatar’s banks also led the region on the interest income side of the profit breakdown, with growth of net interest income (NII) registering a growth rate of 30.6% y-o-y. The two most impressive results in this area came from Masraf Al Rayan, which showed a 40.9% growth in net financing income, and QNB, which saw NII rise by 46.5%, largely as a result of the consolidation of its subsidiary in Egypt.

Where the effect of the new personal lending regulations does become apparent, however, is in the net interest margin (NIM) results for the sector. According to published results, the average NIM (or in the case of Islamic banks, net financing income) of QNB, CBQ, Doha Bank, QIB, Qatar International Islamic Bank, Al Khaliji and Masraf Al Rayan stood at 3.9% at the close of 2010. Throughout 2011 and 2012 NIMs declined gradually across the banking sector to reach an average of some 2.5% in 2013.

As banks in the country have started to reconsider their business models, there has been a greater focus on developing more diverse investment strategies. R. Seetharaman, the group CEO of Doha Bank, told OBG, “Asset allocation is changing with market dynamics. The days of relying on retail are gone and, particularly in Qatar, this segment is not growing as it once did. Wholesale banking is taking over for total assets. We have seen commercial banks placing more emphasis on this segment as opposed to retail as you can invest 20% more of your Tier 1 capital.”

Lending

In funding terms, Qatar’s banks benefit from operating in a robust economy and the healthy risk ratings which grant them favourable access to international bond markets. According to QNB, the public sector accounts for 41% of total banking system deposits, and therefore the projected fiscal surpluses will underpin deposit growth over coming years, with aggregated deposits for the sector expected to grow from $126bn in 2012 to $181bn by 2014 – an average annual rate of 20%. This positive trend means that Qatar’s banks are well positioned to increase their lending activity over the short and medium term, and one of the more interesting sector issues is the question of where this asset growth will come from. The obvious source, given that the public sector accounted for 41.7% of domestic credit in 2013, is the large project pipeline which has been established by Qatar National Vision 2030 – the country’s long-term development plan. Moreover, the government has formulated sizeable development plans in view of the nation’s hosting of the 2022 FIFA World Cup, with project activity widely anticipated to accelerate between 2013 and 2018. Major developments include the Doha Metro project (which forms part of the wider Qatar Rail Development Programme that will also consist of a light rail network and long distance passenger and freight lines linking GCC states), nine new air-conditioned stadiums, the Sharq Crossing (which will span Doha Bay between the airport and West Bay and from West Bay to Katara) and the New Port Project (a five-phase project to be completed in 2016).

The strength of the funding base of Qatar’s banks also grants them the ability to expand overseas in pursuit of new lending opportunities. Many of the larger lenders already have an international footprint in the form of branches, representative offices and subsidiaries, with QNB leading the way in this regard with a presence in 26 foreign markets. According to the QCB, overseas assets of the commercial banks expanded by 54.4% between November 2008 and November 2013, and this trend is expected to continue in the short term as lenders react to increasing competition by looking abroad.

Lending For Small Business

As well as looking to other markets, banks in Qatar are moving away from a traditional emphasis on wholesale lending in a bid to increase assets. As in many regional jurisdictions, small and medium-sized enterprises (SMEs) in Qatar have historically faced difficulty securing finance, as the widespread availability of high-margin, lowrisk “big ticket” lending has provided the banks with a more straightforward route to profit. The government has made efforts to increase the ability of SMEs to access capital, most notably with the creation of the Al Dhameen programme. The indirect lending initiative was launched by the Qatar Development Bank (QDB) to assist smaller firms that were unable to obtain funding from banks due to a lack of collateral or financial history, and firms meeting the QDB’s requirements are able to borrow at interest rates of under 7% and terms of up to five years. The scheme operates through 10 partner institutions, which include QNB, CBQ, Doha Bank, Masraf Al Rayan, QIB and a number of non-bank financial services companies.

An increasingly competitive market has made SME lending a more attractive proposition, and the nation’s trajectory of development suggests that they will play a bigger role in the credit mix in future. “We have identified a large number of SMEs in the market which are currently underserved. These are firms of between 10 and 30 employees that are in need of short-term funding all of the time,” Salah Murad, CEO of Ahli Bank, told OBG. The underserved SME segment is expected to grow in the coming years.

Construction and transport projects make up around 81.7% of developments currently in progress, according to QNB, and the activity of the larger players in these areas is generating a need for smaller firms to supply and serve them. For this reason, most of Qatar’s banks are recalibrating their organisational structures to better accommodate the needs of the nation’s smaller businesses, with strategies typically including the establishment of dedicated SME banking centres, dedicated relationship managers, 24-hour banking payroll services, overnight vaulting and time deposits, cash and cheque collection, and a more flexible approach to lending and financing.

Credit Bureau

In their pursuit of SME custom, Qatar’s banks have been significantly assisted by the development of the Qatar Credit Bureau. The new body was established in March 2011, after a two-year review of credit bureau models which saw a central bank team undertake research trips to markets as diverse as Malaysia and the UK. The Credit Bureau has chosen the latest technology available in the market with the best international standards.

Prior to the bureau’s inception, Qatar’s banks had limited access to clients’ credit histories, and could only obtain a figure from the central bank for the total amount of credit an individual or company had outstanding. However, banks are now able to obtain a more granular credit history for personal and corporate customers, greatly enhancing their risk management capability. The arrival of the Qatar Credit Bureau to the market has also brought advantages to creditworthy customers of financial institutions: the platform allows banks to give customers credit scores, and compete for those with high rating by offering favourable interest rates and enhanced services.

Beyond the credit scoring function, the Qatar Credit Bureau has begun to roll out a number of other advanced services. These include an account followup service, by which member institutions can monitor accounts and receive alerts on changes occurring in a customer’s credit portfolio, and a portfolio monitoring service, which will enable member institutions to assess and track the strengths and competiveness of portfolios, as well as assist them in formulating effective marketing strategies.

Although in the early stages of its development, the industry response to the Qatar Credit Bureau’s introduction has been positive, leading to a high degree of cooperation from the country’s banks. “The next stage of the credit bureau’s development is likely to include extending the platform to other parts of the economy beyond the banking industry, such as the telecoms and insurance sectors,” Sheikh Bandar bin Mohamed bin Saud Al Thani, CEO of the Qatar Credit Bureau, told OBG. While this ambition demands the overcoming some complex technological and regulatory hurdles, the broadening of the Qatar Credit Bureau’s mandate in this way promises to enhance the ability of the nation’s financial service providers to make well-informed, risk-aware decisions.

Outlook

Qatar’s banks are well positioned to take advantage of the anticipated ongoing economic development of the country, as the implementation of Qatar National Vision 2030 and the projects associated with the 2022 FIFA World Cup takes place. Their recent results show them to be profitable and well capitalised, with domestic lenders accounting for a large proportion of the macroeconomic activities of the nation’s increasingly diverse economy. As the development pipeline continues to feed the sector with new opportunities, an already extant trend of asset and profit growth is likely to continue. Listed Qatari banks made a combined net profit of QR17.3bn ($4.7bn) in 2013, against QR16.06bn ($4.4bn) in 2012, while liquidity in the market has significantly improved y-o-y from around QR484.9bn ($132.8bn) in December 2012 to QR603.3bn ($165.2bn) by the end of 2013, according to data aggregated from major banks’ annual financial statements. Key to the sector’s future expansion is continued state spending. The 2013/14 budget is the largest in Qatar’s history, and calls for an 18% increase in spending to reach ($55.2bn).

Already, some $140bn has been pledged by the government on infrastructure development until 2022, a move which will further boost the non-hydrocarbons economy and allow lenders to pursue asset growth amongst the large number of private sector firms that the projected flow of tenders will attract.

While a downside risk does exist in the form of a decline in hydrocarbons prices, most projections have used a more likely baseline of Brent trading within the $100-120 band over the next year to foresee a continuation of the budget surpluses to which Qatar has become accustomed. Against such a macroeconomic backdrop, the outlook for the country’s banks is a positive one, with expansion at home and abroad.

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The Report: Qatar 2014

Banking chapter from The Report: Qatar 2014

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