By Satish Kanady
DOHA: Balance-sheet constraints, intense competition and undiversified funding portfolios are posing challenges to the growth of Qatari banks. With government funding flowing freely to real estate and construction sector, the banks’ asset quality should also continue to improve, Fitch Ratings noted in its 2013 GCC/Middle East Banks Outlook.
Qatar’s rapid loan growth has been well above the average in the region. It has been more or less matched by deposit growth, to a large extent public sector, but loans/deposits ratios are gradually creeping up.
A further downside to rapid growth is the concentration of risk that may increase sharply-although risk is mitigated by government backing for the largest corporates and the major infrastructure projects in Qatar.
Although all the major banks have diverse revenue sources, margin pressure could arise from higher funding costs linked to increasing reliance on international borrowing, even though the banks currently remain essentially funded by customer deposits. Competition may also increase following the decision of the Qatar Central Bank (QCB) to separate conventional and Islamic banking operations.
While this may prove an attractive opportunity for existing Islamic banks, there is little sign to date of any negative impact on the conventional banks.
“Asset quality (of Qatari banks) should continue to improve, with government spending flowing freely, mainly into the real estate and construction sectors. Asset quality ratios are perhaps flattered by rapid loan while interest rate caps will also make retail lending less attractive to the banks. As loans loss coverage is very high and NPLs (Non Performing Loans) have probably peaked, pressures on earnings from impairment charges is likely to be low,” the ratings agency noted.
Some funding pressure is likely for banks, apart from Qatar National Bank (QNB), that already have loans/customer deposits ratios have 100 percent.
Government spending should feed through into increased customer deposits, but rapid loan growth could exceed deposit growth in the future. Liquidity is currently reasonable, reflecting large holdings of liquid assets including Qatari government securities, but could come under strain due to lengthening loan maturities.
However, in light of past liquidity support for the banks, support from the authorities is likely to remains strong. Banks which have issued in the international debt markets have been able to do so at relatively modest pricing. Capital ratios remain sound, but could be eroded as loan books expand.
According to the Fitch Outlook, banks in the Gulf region are set to see a gradual improvement in profitability on rising fee income and lower impairment charges this year.. The ratings agency said the outlook for most banks in the GCC/Middle East region was stable, largely driven by the probability of sovereign support.
Fitch said it expects loan growth to increase in 2013, as confidence improves and infrastructure projects come on stream, stimulating the local economies. But the agency also warned that much also depends on the global economy and regional unrest.
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