Qatari banks remain resilient despite low oil prices and the negative impact this could have on economic growth in the Gulf. But the threat of a possible weakening in bank liquidity looms on the horizon.

Concerns are growing that a continued long-term oil slump, coupled with the government’s plans to invest heavily in infrastructure, could eventually affect the financial sector’s enviable deposit levels.

“There will be elevated liquidity pressures, particularly in Qatar, given the very high proportion of government and related deposits in the system and the very high levels of public spending needed for the 2022 World Cup and associated infrastructure spending,” said a report issued in March by US ratings agency Moody’s Investors Service.

Highly liquid

For now, the country’s banking sector remains highly liquid, with a growing asset base and a low non-performing loan (NPL) ratio on its books.

The leading Qatari financial institutions have begun posting strong first-quarter results for 2015, with most seeing increases in their quarterly profits.

Qatar National Bank (QNB), the largest lender, reported profits of QR2.7bn ($741.6m) in the first quarter, an increase of 10 per cent on the same period last year. Doha Bank reported an increase of 4.3 per cent in profits, compared with the first quarter of last year.

Qatari banks are considered to be highly stable by investors and ratings agencies. In mid-March, the US’ Fitch Ratings upgraded the long-term issuer default ratings (IDRs) of seven banks. Commercial Bank of Qatar, Doha Bank, Qatar Islamic Bank, Al-Khalij Commercial Bank, Qatar International Islamic Bank and Ahli Bank were all upgraded to A+ from A. QNB’s long-term IDR was increased from AA- to A+ and all the banks have ‘stable’ outlooks. According to Fitch, the Qatari banking sector is highly capitalised, with ‘solid’ asset quality. The sector’s NPL ratio is below 2 per cent.

Market confidence

In mid-April, a relatively new Qatari lender, Barwa Bank, was granted a first-time rating by Moody’s. The Islamic bank was set up in 2011 and has now secured a long and short-term local and foreign currency issuer rating of A2 with a stable outlook.

The high rating reflects the wider market confidence in Qatari banks, as well as recognising Barwa Bank’s stable asset quality, strong profitability and stable funding sources.

QNB clearly dominates the Qatari banking sector, being the biggest in the country and one of the largest in the region. It achieved profits of QR10.5bn in 2014, a 10 per cent increase on 2013. Total assets hit a record high of QR486bn, up 9.7 per cent on 2013.

It also had a capital adequacy ratio of 15.1 per cent as of the end of March 2015, which is higher than the minimum requirements set by international regulators and the Basel Committee on Banking Supervision.

Loans and advances grew by 8.9 per cent by the end of March this year, compared with the first quarter of 2014, to reach QR345bn. This growth has, however, pushed up the bank’s loan-to-deposit ratio to a fairly high 94 per cent. An overly high ratio could mean the lender lacks enough liquidity to cover unexpected funding needs.

Yet QNB has a strong and rising deposit base, with customer deposits reaching QR369bn, an increase of 7 per cent on the same quarter in 2014.

The highly liquid banking market could, however, begin to feel the pinch if oil prices remain low in the long term. The Qatari government is committed to awarding about $220bn-worth of investments over the next 10 years, related to infrastructure, education and health schemes.

Some of the projects, such as the Doha Metro, are already under way and many are expected to be completed before Qatar hosts the Fifa football World Cup in 2022.

Although the government has significant reserves and has benefited from years of continued GDP growth, sustained low oil prices will affect the government’s budget.

Looming deficit

The Washington-based IMF has forecast Doha’s budget will fall into deficit from 2016. This will mean the government will have to increasingly turn to the private sector and local banks to plug any gaps in the required funding.

Increased lending by local banks could have a detrimental impact on the sector if it is not adequately managed.

“[Higher levels of local lending] may cause banks’ net external liability position to widen and their loan-to-deposit ratios to rise,” says a note issued earlier this year by Fitch Ratings.

As well as managing any spike in lending fuelled by the infrastructure boom, Qatari banks will also be wary of potential increases in their costs of funding.

There are some concerns the government might draw down on its significant deposits placed in the banking sector in order to fund its infrastructure plans, particularly if low oil prices persist. The banking sector has a particularly high ratio of public sector deposits to total deposits, and any withdrawal of government money could increase the banks’ cost of funds.

This means it will be more expensive for banks to lend and the costs will either be passed on to borrowers or will have to be absorbed by the banks themselves.

Pronounced reliance

According to a February report by Kuwait’s NBK Capital, Qatari banks’ reliance on public sector deposits is more pronounced than in other Gulf states. The sector’s deposit base comprises 41 per cent public sector deposits and 59 per cent private sector deposits.

In comparison, in the UAE and Saudi Arabia, public sector deposits represent 31 per cent and 22 per cent of total bank deposits respectively.

Fears about a spike in the cost of funding for banks have been partially tempered by memories of the previous decline in oil prices in mid-2009. At that time, total deposits remained flat and there was no “serious hit” to funding, says the NBK report. However, there may still be a need for banks to expand their portfolios of funding sources.

Diversifying funding

QNB has already led the way in diversifying its funding. The bank’s public sector deposits dropped to 40 per cent by the end of 2014, from 61 per cent in 2012. Corporates and individuals now make up 38 per cent and 22 per cent of the bank’s deposit base respectively, says NBK Capital. This development has further improved the bank’s immunity to the negative impact of low oil prices.

Earlier this year, QNB raised a $3bn syndicated loan via a group of local and international banks. Some lenders could also potentially consider turning to the capital markets and issuing debt to support their growth.

“I wouldn’t be surprised if some of the banks do something in terms of raising additional capital for growth,” says Aladdin Hangari, CEO of Credit Suisse Qatar. He adds that central bank regulations that limit lending relative to the level of total customer deposits may encourage lenders to consider various capital-optimisation exercises.

Private sector

QNB is also leading the way in terms of the diversification of its loan book away from being dominated by public sector loans. It is a move that is helping to reduce the bank’s concentration of risk on one particular sector and, in theory, should strengthen its credit profile. The bank saw its loan book grow by 24 per cent in 2013 and 9 per cent in 2014, levels of growth partially achieved by broadening its lending activities.

QNB’s exposure to industry, commercial and services increased from 13 per cent in 2012 to 30 per cent in 2014. This compares with a reduction in the bank’s public sector exposure from 66 per cent in 2012 to 47 per cent in 2014.

Although the low oil price environment and the need to drive investment into infrastructure present some challenges to the Qatari banking sector, with careful management of their funding bases and loan books the banks are well-positioned to manage the risks and remain profitable.