QATAR'S leading banks can look back on 1995 with some satisfaction. Despite tight liquidity and sluggish economic growth, the three largest institutions saw steady improvements right across their balance sheets with profits rising by anything from 5 to 60 per cent.

The performance was all the more impressive in the light of the tight liquidity. In its first report on the Qatari banking system, published in August, US rating agency Moody's Investors Services pointed out that maintaining adequate liquidity has been the main challenge for local banks in recent years. Aggregate figures for the banking system imply that the deteriorating liquidity situation abated in 1995, but anecdotal evidence suggests that it remained tight during the year and into the first months of 1996'. Moody's also noted that while bank lending has increased by 11 per cent a year over the past five years, the annual average growth in gross domestic product (GDP) has been close to zero. 'This disparity is so wide that it is prima facie a cause for concern about asset quality.' the agency commented.

The asset quality issue has to be placed in context, however. A degree of security is provided by the dominant role the government plays in the lending activities of the banks, accounting for over 40 per cent of all borrowings. In addition, local banks stress that while personal loans now account for 20 per cent of all private borrowings, they are still maintaining a cautious and conservative approach and striving to avoid overexposure to a single client.

Despite the level of governmeni borrowing, local banks have only been able to play a limited role in Qatar's ambitious programme to expand its gas and industrial activities, on account of the sums required and their relatively small deposit base And the situation is unlikely to change Says Doha Bank's general manager Maqbool Khalfan, 'We are not really capable of financing the mega-projects, although we are playing an indirect role by lending to the government, which use some of the funds to finance their LCs (letters of credit). For the huge projects, it is really up to the large multi-national institutions to come forward.' One foreign institution looking for a more active role is Citibank, which has applied for a banking licence.

Qatar Central Bank (QCB) has been stepping up its regulatory activities over the past 12 months. In August 1995, it took a further step to liberalise the interest rate regime, by allowing banks for the first time to set interest rates and commissions on credit facilities themselves. More recently, it has announced that from this year, all local banks will have to be externally audited by two accountancy firms, in a move designed to give greater comfort to foreign correspondent banks.

The decision to liberalise interest rates has undoubtedly given local banks greater scope to increase their interest earnings. 'It has added to the profitability of banks,' says Khalfan. 'But there is also competition in the market. At the same time, every bank has its own clients, which have their own needs, so rates tend to be set on a case by case basis.'

Further initiatives are expected from QCB over the coming six months, which should increase bank earnings over the mediumlong term. A formal stock exchange is likely to be established by the end of the year and cover trading in 18 listed companies. The government is also considering issuing treasury instruments to assist in its local borrowing requirements. If approved, the move could foster greater transparency in the sector and nurture a secondary market in bills or bonds. 'The emergence of a more mature capital market, including for example the introduction of treasury instruments would give the banks more scope to diversify,' Moody's said.

The most significant impact on the banking sector will come when revenues from the two liquefied natural gas (LNG) projects start to flow into government coffers at the turn of the century, dramatically easing Qatar's liquidity problems. In the intervening period, Moody's believes that profitability will be maintained , although 'it will be subject to bank-specific factors, such as the performance of investments and dealing room earnings.'

Among the major institutions:

Qatar National Bank (QNB). The dominant player in the local banking scene, holding over 35 per cent of total deposits and 52 per cent of total assets, QNB saw net profits rise by 5 per cent to QR 289 million in 1995. Profitability would have been considerably higher had the bank not decided to carry out a thorough credit review which resulted in provisions for doubtful loans rising to QR 55.2 million from QR 21 million previously.

The one-off credit review exercise was one of the first acts sanctioned by QNB's new general manager and chief executive John Finigan, and has been seen as a first step in the bank's plan to consolidate and expand its dominant position in the local market. 'We have a very clear sense of purpose of where we want to be by the year 2000,' Finigan says. We want to meet all the requirements of Qataris and to eliminate the perception that we are a sleeping giant.'

The growth strategy aims to improve the efficiency and expand the range of services on offer at the bank. A key goal is to play a more active role in project and international finance. 'Over the medium term, a clear objective is to become more of an investment bank, to assist in mobilising resources for Qatar and the corporate sector, where there are many top quality international engineering firms present,' says Finigan.

This summer has provided the first tangible evidence of the new approach. For the first time in six years, the bank assumed a leading role in an international loan syndication, acting as co-arranger and special adviser on the $250 million sovereign loan for the state of Qatar.

The bank has already strengthened its treasury operations, by bringing in a new management team. It is also seeking to reactivate its international branch network and to bolster its retail presence. However, QNB has no wish to risk its reputation for prudence.

'Our growth will be evolutionary rather than revolutionary,' Finigan stresses.

Doha Bank. Profits at Doha Bank, the largest private sector bank, rose by 26.5 per cent in 1995 to QR 34.4 million. The increase was the result of a 30 per cent reduction in loan provisions and higher interest income, accrued on loans extended to finance work on government projects.

During 1995, lending to the government and its agencies jumped by almost 75 per cent to QR 685 million. Similar growth was achieved in its letters of credit business, which rose to QR 943 million.

Doha Bank is a major player in the remittance market and is looking to step up its retail activities. A new branch is scheduled to open in Doha this year and a visa card product is being developed. It has also engaged consultant Arthur Andersen to replace its mainframe computer system with an open network system.

Forging ahead: QNB targets local projects

Commercial Bank of Qatar (CBQ). Of all the local banks, CBQ achieved the biggest surge in net profits in 1995, with a rise of 60 per cent to QR 38 million. The increase was attributed to a 53 per cent jump in net operating income and a 32 per cent rise in net interest income and followed a disappointing 1994, when profits were hit by losses in the investment division.

The outlook for 1996 is also encouraging.

'In the first half of this year, we have seen a significant improvement , especially from the retail and investment sides of the business,' says general manager Tim Nunen. As part of ongoing plans to expand its services, CBQ plans to launch in October a range of new investment products targeted at the individual. The bank is also looking forward to the establishment of the Doha Securities Market. It is already a major broker in the unofficial stock market and in 1994 established the CBQ Qatari share index, which has now become the yardstick for measuring share activity.

With a capital adequacy ratio of 12.5 per cent at the end of 1995 and its operations turning in a solid performance. CBQ has spent much of this year fine tuning its internal operations. It has invested heavily in enhancing its computer systems and sought to rationalise its operating environment by creating more efficient work flows. 'The time to do these things is when you are riding high,' Nunan says.

And, according to Moody's, the bank is doing just that. Described as being 'consistently profitable' and 'demonstrating an ability to enhance liquidity in response to potential tightenings in the local market,' Moody's assigned CBQ in June a financial strength rating of D-plus, the highest among the top three local institutions.