Qatari banks are waiting for Qatar Central Bank (QCB) to communicate its strategy to ease liquidity conditions.

Liquidity tightened significantly in the second half of 2015, after Doha issued a QR15.5bn ($4.3bn) domestic bond in September, which was enthusiastically subscribed by banks.

Now, with the system-wide loan-to-deposit ratio (LDR) at 114.8 per cent in November, banks are under pressure to better balance their books as results season approaches.

“If they have really high LDRs, they have to manage both deposits and loans,” says Shahan Keushgerian, senior research analyst at Qatar National Bank (QNB) Financial Services. “They will have to scale back on lending, targeting a number that gets them closer to their LDR goal rather than growing their loans books by 10-15 per cent, and be more picky about who they lend to, focusing on high-quality names.”

Lending grew 17 per cent year-on-year to the end of November 2015, but deposits rose by just 2.3 per cent, according to the central bank.

The price of lending is also being pushed up, with smaller, less credit-worthy borrowers squeezed out.

Banks’ strategies

Banks are aggressively hunting deposits from large companies in Qatar as well as internationally. Some lenders are also negotiating fixed-term deposits from the few regional banks that still have liquidity by paying high interest rates.

“The Saudis have pulled back liquidity from the rest of the GCC,” says a Qatar-based banker. “It is a perfect storm situation here. Deposit rates are up and banks are bidding for deposits from big names in the GCC, Asia and Europe.”

Overnight interbank rates were at 1.17 per cent in November 2015, compared with 0.72 per cent a year before, according to the central bank.

Banks are also likely to step up their own bond issuance, although the pricing rate will be pushed up by low liquidity among the main buyers – other banks.

Among the most affected banks are understood to be Commercial Bank of Qatar (CBQ), which has an LDR of 114.4 per cent; Masraf al-Rayan, which is heavily dependent on government deposits and saw its deposits decline by 12.1 per cent in the year up to the end of September 2015 to result in an LDR of 113.7 per cent; and Qatar Islamic Bank (QIB), which increased its loan book by a highly agressive 38 per cent in the first nine months, but still had an LDR of about 94 per cent in September.

QIB is now offering certificates of deposit with a two-year expected profit of 2.75 per cent. This follows a $750m five-year sukuk (Islamic bond) issuance in October.

Analysts are eagerly waiting for banks to declare their 2015 results to the Qatar Exchange, which will also give an indication of how much lenders are budgeting to support the 2022 World Cup infrastructure build.

Doubts are now starting to form over whether domestic banks will be able to finance contractors for the planned schemes, which should gather pace in 2016. 

On the Facility D independent water and power project (IWPP), which is expected to reach a financial close imminently, just one local bank, QNB, subscribed to the syndication. It is thought to be the least affected by liquidity issues.

Regulator response

But the central bank has given no clues to the banking sector as to how it will manage the worrying fall in liquidity.

The regulator’s governor, Sheikh Abdullah bin Saud al-Thani, announced in October 2015 that Qatar would not follow the US interest rates rise, as liquidity conditions were improving. The repo rate remained at 4.5 per cent, unchanged since the US slashed interest rates in 2008.

Treasury bill auctions from October were reduced in size, and saw higher interest rates, followed by the apparent cancellation of an auction in January. This was thought to be due to low demand from banks.

The central bank will be unable to cut its interest rates while the US is on an interest rate hiking cycle, due to the dollar peg.

Other options include delaying the implementation of Basel III, which demands banks progressively reduce their LDRs to 100 per cent by the end of 2017, and cutting other equity and deposit requirements.

Rule changes to the way banks report assets and liabilities could also allow them to take different strategies to manage LDRs.

“If banks issue bonds and this is not counted in the LDR, then it is still too high,” says Keushgerian. “Banks are still discussing whether this will be amended, but five or 10-year issuances should be part of the LDR.”