With swelling balance sheets and healthy earnings, Qatar’s largest financial institutions are developing a zest for overseas expansion and for project lending back home.
Qatari banks stand to benefit from the large infrastructure projects planned or under way in the country. An indication of the sector’s burgeoning confidence was seen in November, with reports that Qatar Electricity & Water Company (QEWC) had secured funding from four Qatari banks for the $450m debt financing for the development of the Ras Abu Fontas A2 desalination plant, led by Qatar National Bank (QNB). Although international banks bid on the deal, it was the Qatari entities that provided more competitive pricing, understood to have come in at sub 200 basis point levels.
Banking lending has grown steadily in 2012, rising 18.5 per cent in August to QR479.7bn ($131.8bn). The latest figures from Qatar Central Bank show that loan growth in Qatar was 34 per cent in September. Unsurprisingly, given the infrastructure investment, it is government-related entities that are driving loan growth. The public sector’s share of total loans has increased from 22 per cent in 2007 to 42 per cent in August 2012.
Government-related projects have proven to be the major driver of credit growth, with public sector loans growing by 38 per cent during the first nine months of 2012.
Local banks are well-positioned to benefit from this trend, says Elena Panayiotou, analyst at ratings agency Moody’s Investors Services. “The banks are building expertise, hiring talented personnel and have raised new capital. The government has injected capital in almost all local banks from 2009-11 and acquired a 17 per cent stake in all banks. The capital increases raised their single exposure limits and allowed them to participate in these projects.”
In order to fully capture the opportunities from the infrastructure boom, Qatari banks must still overcome some substantial challenges. Maturity mismatches have undermined local players’ willingness to take on long-tenor project finance loans. QNB, the largest lender by market value, reported loan growth of 55.9 per cent in the first half of the year, yet deposits in the same period grew by only 25.3 per cent. The system-wide loan-to-deposit ratio peaked at 122 per cent in June, prompted by rapid increases in government spending and banks.
To finance these long-term projects, Qatari banks will need to raise longer-term funding, so as to minimise any maturity mismatches in their assets and liabilities.
QNB’s recent $1bn five-year bond issuance is an example of a concerted effort to support its funding profile, while other banks will also likely increase their long-term funding.
The bank completed the $1bn bond issue on 7 November after attracting offers of $3.4bn, taking the total that QNB has borrowed this year so far to almost $4bn. The $1bn five-year issue in November is part of the $7.5bn euro medium-term note programme that was established in late 2011. Under this programme, a $1bn note was also issued in February 2012. “The purpose of the programme is to broaden the investor base attracting long-term funds in order to reduce the mismatch in assets and liabilities. Proceeds from these notes will be for general purposes, funding growth opportunities,” says Mohamad Moabi, assistant general manager at QNB.
Qatari banks in general would like to have some medium- and long-term funding to tackle the asset-liability maturity mismatch, and support growth and expansion plans.
Rise in deposits
Evidence suggests that slowly, but surely, the liquidity burden is being addressed. The sector’s loan-to-deposit ratio dipped slightly to 110 per cent in October, from 112 per cent in September. A rise in domestic deposits is a major contributor to this decline.
“There has been some increase in deposits from foreign sources, which is always a concern, but Central Bank data for the first nine months also seems to show an increase in domestic deposits and a lot of that has come from the cash-rich public sector,” says Mahin Dissanayake, a senior analyst at Fitch Ratings.
Qatari public sector companies are placing large deposits with local banks, most of them denominated in dollars, thereby matching with the increasing dollarisation of the loan books, which reflects the fact that much of project related lending is in dollars.
“We’re satisfied there’s a good match between dollar lending and dollar deposits in Qatar,” says Dissanayake.
“Yes, loan-to-deposit ratios are still high and negative on ratings, but Qatari banks have accessed the international capital markets very successfully and several banks have done large deals this year as there is strong appetite for Qatari risk at the moment.”
If Qatari banks are now better positioned to participate in project lending, QNB – the largest bank with QR351bn of total assets at end-September 2011 – looks well positioned to take the lead, as it did with the Ras Abu Fontas loan.
With excess capital to deploy, QNB has also been the most acquisitive of Qatari institutions, building up a sizeable international presence that has taken it to 24 countries across the globe. In April 2012, QNB acquired a 49 per cent interest in Libya’s Bank of Commerce and Development, a key player in the North African market. Egypt may be next on the agenda; with talks under way with France’s Societe Generale to acquire the latter’s 77.2 per cent stake in National Societe General Bank Egypt.
The growing regional footprint makes sense, but analysts warn that the going may be tough. “Qatari banks are viewing opportunities outside their home market to diversify their geographical presence, assets and earnings,” says Panayiotou.
“Nevertheless, despite the growth potential in some of these emerging markets, we also see significant risks relating to the operating environments and in Qatari banks’ capacity and expertise to mitigate risks as they expand in these markets.”
Qatari banks are also looking to diversify their offerings and keep pace with the increasingly sophisticated demands of Qatari and Gulf customers. Growth has been limited as a result of price caps placed on retail lending in 2011. This has squeezed net interest margins for many Qatari banks.
That, however, leaves more scope for developing investment banking and wealth management products. The Qatar Financial Centre Authority has identified asset management in particular as a cornerstone of its mission to transform Doha into a fully-fledged financial hub, with the aim of achieving assets under management of up to $200bn by 2020.
QInvest’s announcement of plans in May that it would take a 60 per cent stake in Cairo-based EFG Hermes signalled Doha’s interest in ramping up its credentials as an investment-banking centre. International banks also appear to have woken up to Qatar’s potential. In November, Credit Suisse teamed up with sovereign wealth fund Qatar Holding to create Aventicum Capital Management, an asset-management company that aims to tap the Gulf region’s sizeable wealth pool.
Local players are also looking to play a role in developing asset management and brokerage services. Commercialbank Capital (Comcap), a business unit of Commercialbank of Qatar, was established last year in an attempt to offer advisory banking services, as well as asset management and research, and brokerage services.
Qatari depositors are becoming more sophisticated, says Comcap chief executive officer Alex Carre de Malberg, and are therefore looking for new types of investment products. This is leading banks and asset managers to believe there is potential to develop an asset management industry, with support from the QFC.
“Both in supply and demand, there is much more focus on debt-type products because investors want downside protection and minimum yield,” says Carre de Malberg. “At the same time, from the demand side, there’s a willingness to reduce the overall cost of funding, thus leveraging projects to the maximum, and therefore attract as much debt and or mezzanine on these projects as is possible.”
With volumes on stock markets dwindling and with a large number of institutions and private investors sitting on portfolios that still have losses in them, investors are reluctant to actively trade and further invest in what they perceive as a very volatile equity environment.
This, says Carre de Malberg, is driving an interest in Qatari-issued debt even though the stock market itself has been proven more volatile than other regional bourses. The Comcap USD Qatar bond index, which has returned 11.1 per cent since January, is further proof.
“One of the initial objectives of Qatar authorities when allowing banks to have their own brokerage subsidiaries was that it would drive more trading volume in part thanks to banks engaging in proprietary trading,” says Carre de Malberg. “However, given the change in risk appetite after the financial crisis and regulatory constraints, banks aren’t really doing that and are therefore not providing the additional liquidity that was expected at the time.”
The big question now is whether other government-related or private entities will be willing to issue bonds. On the corporate side, this is going to be driven by the flexibility that issuing a bond provides for, versus the ease of structuring bilateral loans, which is the main way corporates source funding.
Overall, these are good times for Qatari banks. Profits are still healthy, and although margins have been flat, increased volumes are compensating for this. Despite some impact from the cap on margins for retail lending, volume growth should offset the contraction on the retail side.
Banks with the strength of balance sheet will be looking well beyond Qatar’s shores to deploy their liquidity. With an active slate of projects still coming to the domestic market, they should also be well placed to profit at home too.
Qatar banking sector in numbers
$450m: Funding secured by Qatar Electricity & Water Company from local banks
18.5 per cent: The rise in bank lending in Qatar at the end of August 2012