While international banks want to be part of Qatar’s grand plan to become a global financial centre, its home-grown financial institutions are seeking expansion opportunities overseas.

The banking sector has grown steadily across the Gulf in tandem with the rise in oil and gas-generated wealth.

But for the well-established domestic banks to continue generating the returns required by shareholders, the Gulf’s banks – Qatar’s included – have little option but to expand abroad as their home markets become crowded.

The anticipated harmonisation of Qatar Financial Centre (QFC) regulations with the domestic banking regulator is also prompting many banks to seek opportunities overseas.

Once the new Qatar regulator is in place, it is expected to lower the barriers to QFC-licensed firms seeking riyal-denominated business, which they are currently prohibited from doing. This will allow non-Qatari banks greater flexibility to expand local operations.

Regulatory restrictions

However, the regulatory changes, coupled with global economic turmoil, are slowing progress on overseas expansion plans.

“The confusion as to how the banks will be regulated under the new regulator, and problems raising any kind of financing, means that expansion plans will have to slow down while Qatari banks look at internal issues,” says one senior Qatari banker.

Qatari banks have to date followed two distinct routes to growth: acquisitive and organic. Commercial Bank of Qatar (CBQ) is one of the most successful at entering markets, acquiring major stakes in existing banks in both the UAE and Oman.

CBQ opted to sign management agreements with these banks, effectively giving it control of the banks while having to share the rewards with a pool of investors.

“One of the problems with trying to expand in this region is that it is difficult to get approval from regulators for any complete takeover of a bank in another market,” says one Qatar-based banking analyst.

“What CBQ is doing is a good way of getting around these restrictions, although the downside is it has to share profits with other shareholders and does not get to build its own brand by incorporating its acquisitions under the CBQ name.”

Faisal Hasan, head of research at Kuwait-based Global Investment House, says despite not being able to fully take over these banks, CBQ benefits through synergies between the businesses it acquires.

“It will depend on the management agreement that CBQ reaches, and more details on this will become clear as the bank reports future earnings,” says Hasan.

“But we expect that it is still managing to take some costs out of the enlarged business and get some benefits of scaling up.

“The strategy of CBQ will continue along the same lines because it also gives it access to a wider source of deposit funding, helping to lower the bank’s overall funding costs.”

Qatar Islamic Bank (QIB) is one of the few that are pursuing purely organic growth. Although Salah Jaidah, chief executive officer (CEO) of QIB, says he is open to acquisitions, the bank has yet to complete one. Instead, it has expanded by establishing subsidiaries in key foreign markets.

“With acquisitions, it is obvious most of them are done for the sake of a licence to operate in a new market,” says Jaidah.

“We are not trying to enter competitive markets, where it is difficult to get a licence; we are trying to enter markets that have not been exposed to Islamic banking, where we can behave like pioneers.”

Ambitious strategy

While other banks may have made more progress in developing revenue streams in new markets, QIB has been the most ambitious.

“QIB has the potential to develop into a huge institution with capabilities beyond the Middle East,” says one Qatari banker.

There is a substantial difference in strategy between QIB and other Qatari banks. While the majority are seeking to serve Arab regions, or establish themselves in markets with links with Qatar, QIB is planning a global Islamic finance network.

This strategy requires a greater presence in markets such as Europe and the Far East, and has resulted in the creation of European Finance House and Asian Finance Bank.

If these banks succeed in their ambitions, they will become major conduits for structuring corporate Islamic finance transactions from those markets, and for placing Islamic finance transactions through the QIB network.

It is perhaps not surprising that the biggest bank in Qatar, Qatar National Bank (QNB), with its close ties to the government and Qatar Investment Authority (QIA), which holds a 50 per cent stake, is the best placed in the market to expand overseas.

The transfer of Doha’s stake in Tunisian-Qatari Bank, and Jordan’s Housing Bank for Trade & Finance, to QNB ownership are examples of how it has capitalised on its government ties.

Through organic growth, QNB has opened branches in Kuwait, Oman and Yemen, adding to branches in London and Paris.

It is also considering expanding into Jordan through the acquisition of a 30 per cent stake in The Housing Bank for Trade & Finance, and the establishment of Qatar National Bank-Syria to develop its franchise in the Syrian market.

QNB is expected to accelerate these expansion plans in the wake of the announcement in January by Ali Shareef al-Emadi, CEO of QNB, that the bank aims to be earning 30 per cent of its profits from overseas operations by 2013.

Foreign acquisitions

In August this year, QNB announced the acquisition of a 23 per cent stake in Dubai-based Commercial Bank International, worth about $273m.

This is the latest in a flurry of recent activity from a bank that had not made an acquisition since the purchase of UK wealth management company Ansbacher for $269m in 2004.

“QNB obviously has the benefits of its size and backing by the state that will help it in its expansion ambitions,” says one Qatari banker at a rival bank.

QNB is also considering restructuring its capital base to help it fund further expansion. In April, it completed a QR7.7bn capital-raising deal with shareholders to fund expansion.

Even Qatar’s newest bank, Al-Khaliji, established in 2007, is starting to expand outside Qatar.

In August, it purchased the UAE assets of France’s BLC Bank for $300m. Robin McCall, managing director of Al-Khaliji, says the bank is now looking at expanding into the other GCC countries.

Doha Bank says it expects to spend $300m on acquisitions this year, and despite the turmoil in global financial markets, it is seeking acquisitions in Asia and the US, because it sees the Qatari market as close to saturation.

Although high oil and gas prices provide Qatar with a fiscal buffer against the impact of the global credit crunch, the turmoil is expected to affect Qatari banks’ appetite for foreign forays.

“With all the uncertainty in the financial sector, it seems unlikely that the Qatari banks will continue to pursue acquisition plans until the market has stabilised,” says Hasan.

All the Qatari banks have ceased lending long-term dollars because of the impact of the credit crunch on borrowing rates between banks. This will also affect their ability to fund expansion plans.

Banks such as CBQ and QNB, which are pursuing acquisitive expansion strategies, will reap the immediate benefits of increasing their scale by quickly bolting on new franchises, but these carry risks.

“This strategy is more prone to risks,” says the Qatar-based analyst.

“In the current market in the Middle East, you are more likely to overpay for an acquisition, and then there are risks in integrating a different institution with different systems and a different culture.

Although these can be managed, they can never be fully mitigated.”

In contrast, an organic expansion strategy such as QIB’s allows it to create operations in its own image, without the risks of integrating existing firms.

The downside is the length of time that licensing applications take, and then building a whole new business in a completely new market from scratch.

Most analysts agree that the boom years of high double-digit growth for GCC banks are over, as competition drives down revenues and inflates asset prices.

“What we are seeing is an erosion of profitability in terms of a return on assets,” says Raj Madha, senior research analyst at Egyptian investment bank EFG-Hermes.

Although this is occurring across the region, it does mean the banks that are only now looking to expand into other markets have missed the most lucrative period.

QNB has made good progress entering underdeveloped markets such as Jordan, Syria and Tunisia.

But even QNB is small in comparison with its regional peers in the UAE and Saudi Arabia. By expanding overseas, Qatar’s banks are taking on tougher, bigger competition, making rapid growth vital.

This growth will become even more important as foreign banks are allowed to more openly compete for Qatar’s domestic business under the new regulator, and as barriers to cross-border competition gradually erode with the economic integration of the GCC.

Key fact

Qatar National Bank aims to generate 30 per cent of profits from overseas operations by 2013