Financial sector prepares for golden era

16 April 2014

Highly liquid and supported by strong balance sheets, Qatar’s banks are preparing for a boom in lending to finance the country’s infrastructure plans in the run-up to the 2022 World Cup

The outlook could not be brighter for Qatar’s financial sector. Highly liquid, the country’s banks are poised to enter a golden era as Doha accelerates its infrastructure programme in the build-up to the 2022 Fifa football World Cup.

A sharp slowdown in lending growth in 2013 saw domestic credit growth fall to 11 per cent, about half the rate seen in 2012 due to delays on key projects. However, the increased project activity seen across the country today means local banks are set for a return to very high level of growth in lending volumes.

Doha’s infrastructure boom will create opportunities for lenders to provide not only project finance but also other services such as corporate finance for capital spending programmes, contractor finance and export credit agency (ECA)-backed financing to help local companies procure goods and services from abroad.

“The full weight of the projects hasn’t been released into the market yet,” says Richard Keery, head of commercial banking in Qatar at UK lender HSBC. “But there has been a steady increase in activity and we are now at the tipping point.”

Banks well-positioned

Qatar’s banks are well-positioned to meet the projected hike in demand for financing, with healthy balance sheets displaying high levels of deposits and low volumes of problem loans.

Doha’s infrastructure programme is projected to drive GDP growth of about 5.5-6 per cent in 2014 and more than 7 per cent in 2015. Loan growth is projected to rise between 15 and 20 per cent a year over the same period.

But Qatar’s banks’ fortunes in the coming years depend on Doha’s ability to deliver bankable schemes that run to schedule. The country signalled its intention to accelerate the infrastructure programme in March, when the Finance Ministry announced a 3.7 per cent increase in spending in the 2014-15 fiscal year. Much of the QR218.4bn ($60bn) budget is allocated to infrastructure projects including roads and stadiums.

Speaking at MEED’s Qatar Projects 2014 conference in Doha in March, Ali al-Kuwari, acting group CEO of the country’s largest bank Qatar National Bank (QNB) said: “We forecast spending of $29bn this year on projects, with the biggest share coming from the construction and transport sectors.”

Local banks will play the lead role in financing the country’s infrastructure programme and the state’s power and water sector set the tone for the way ahead at the end of last year, when Qatar General Electricity & Water Corporation (Kahramaa) reached financial close on the $500m Ras Abu Fontas A2 independent water and power project (IWPP). The deal was unique in that all of the debt financing came from local banks, with QNB providing $180m of conventional debt and a further $270m coming from Islamic facilities provided by Barwa Bank, Masraf al-Rayan and Qatar Islamic Bank.

Qatar’s next planned IWPP is the $3bn Facility D. Following a prequalification round in 2013, developer bids were scheduled for the start of 2014, although this has been subsequently extended twice, with bids now due for submission at the end of May. Given the size of the project, banks and government-backed ECAs will play a key role in providing project financing.

Progress is beginning to be made elsewhere, including on the World Cup stadiums. The first stadium construction contract was awarded in early April to a joint venture of Belgium’s Six Construct and the local Midmac Contracting Company. Companies have also been invited to express interest in construction deals for the estimated $12bn Sharq Crossing scheme, which will see the construction of bridges across Doha Bay.

In anticipation of the boom in infrastructure projects, Qatar’s banks are strengthening their finances. The majority of local lenders posted strong profit growth in 2013, with QNB posting profits of QR9.5bn, marking an increase of 13.7 per cent on the previous year.

Although lending growth slowed in 2013 compared with 2012, domestic bank credit reached QR533bn by the end of 2013, an increase of 41 per cent on credit levels in 2011.

Qatari banks are also benefiting from a strengthening deposit base, which has been growing in line with lending. Total deposits reached QR514.8bn at the end of 2013, which is close to a 50 per cent increase on the 2011 figure.

Flexible capacity

“[The banks] are all very well-capitalised and liquid,” says Laila Sadek, analyst at the US’ Fitch Ratings. “They do have the capacity and that capacity can be increased very easily.”

Qatar also has the lowest volume of non-performing loans in the region, with levels expected to remain at about 2 per cent of gross loans in the coming year.

In anticipation of the impending projects boom, many Qatari banks have restructured to increase their focus on the infrastructure sector. Investment lender Qatar First Bank (QFB) set up a commercial banking arm in mid-2013 and is targeting annual growth of 20 per cent. The bank is also planning to launch an initial public offering (IPO) on the Qatar Stock Exchange to further grow its business. The flotation is awaiting regulatory approval.

“Everyone is talking about spending to build a nation that is well-equipped to host the World Cup and fulfil its 2030 vision,” says Ahmad Meshari, acting CEO of QFB. “We want to capitalise on that. That is why we are building up our banking capacity and introducing new products.”

Barwa Bank, one of the newest Islamic banks in Qatar, is also looking to capitalise on the state’s infrastructure boom. It recently acted as mandated lead arranger, along with the UAE’s Mashreq Bank, for a $500m sharia-compliant syndicated loan for the local developer Ezdan Holding Group. The loan closed on 24 March and will be used to finance commercial, residential and real estate developments in Qatar.

The transaction further demonstrates the growing might of Qatari banks, with Barwa Bank’s chief business officer, Khalid al-Ahbabi, referring to it as a “watershed deal” that demonstrates local banks are not just plugging the gap in liquidity but are also playing a key role in structuring deals.

But while Qatar’s banks gear up for a lending boom, is there a risk they might get carried away in the run-up to the World Cup only to find themselves overextended in a post-tournament slowdown? Fitch Ratings’ Sadek thinks not.

“Qatar has long deadlines in place, which, for the foreseeable future, will help maintain real estate prices and that should shield banks from overextending themselves,” she says.

Sadek also disputes claims that banks could become overly reliant on international financing, particularly if lending starts to significantly exceed deposits.

“I don’t think they will have to tap international markets for funding, there will be enough local deposits to fund this,” she says. “But they will issue debt for other reasons such as tenor matching and securing longer-term debt for longer-term projects.” 

Delayed payments

The major risk facing Qatar’s banks relates to the management and timing of schemes. “One trend we are seeing is delays or lags in payment,” says Sadek. “Contractors are not being paid on time and cash flows aren’t quite adjusted right. But I don’t see that as an issue – at the end of the day they do get repaid.”

“It is not so much an issue of financing but scheduling and performance risk,” says HSBC’s Keery, adding that issues such as delays to signing off projects could throw schemes off course.

With many opportunities ahead and strong balance sheets, Qatar’s banks are well-set for expansion. But they must take into account the risks of delays and cost overruns that accompany large infrastructure schemes. A major factor in the banks’ success will be the ability of the government to manage its projects well.

Key fact

Loan growth in Qatar is projected to rise between 15 and 20 per cent a year in 2014-15

Source: MEED

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