With an affluent local consumer base and a strong diversifying economy, the business environment for banks in Qatar is more welcoming than almost anywhere else in the Gulf.

The major players have been able to report a firm upwards trend in their financial results for 2010. There is also a steady trickle of new products and enhancements to customer service being launched.

In a country on course to soon become one of the most prosperous consumer societies in the world, banks in Qatar have a powerful incentive to win market share and to position themselves to take advantage of this attractive customer base.

Qatar state support

Compared with the troubles endured by banks across most of the Gulf, the key institutions in Qatar have been well-cushioned. They are based in a country whose government was not afraid to intervene in 2009 to directly strengthen the local financial sector.

The government’s strong intervention in 2009 avoided the risk of a Dubai-style real estate financing crisis

Nicolas Hardy, Standard & Poor’s

“The government’s strong intervention in 2009 avoided the risk of a Dubai-style real estate financing crisis,” says Nicolas Hardy, credit analyst at US rating agency Standard & Poor’s Ratings Services. “Qatar, like Abu Dhabi, has a government with a clear strategy, a readiness to strengthen the state’s role in the economy when needed, and the financial power to do so.”

These measures included a direct capital injection from sovereign wealth fund Qatari Investment Authority (QIA) of up to a 20 per cent stake in the listed Qatari banks’ capital, the purchase of banks’ real-estate portfolios and investments in exchange for government bonds and cash and the purchase of the banks’ listed equity portfolio on the Doha Stock Exchange.

The measures left bankers free to use revenue from the sale of risk assets to finance diversification and improve the balance of their overall exposure. The positive impact of this approach was felt by the Commercial Bank of Qatar (CBQ). In recent comments, Hussain Ibrahim Alfardan, the bank’s managing director noted that the “realignment” of the business undertaken over the past two years had involved an overhaul of risk strategy and a broadening of activity in both the retail and the corporate markets.

Despite some increase in the banks’ problematic loans … asset quality was sustained at good levels

Elena Panayiotou, Moody’s Investors Service

CBQ’s recovery has been fuelled mainly by business with the public sector, while lending to the private sector has continued to weaken. Qatar Holding (QH), a subsidiary of QIA, has injected new capital and almost doubled the authority’s shareholding in the bank, to 16.7 per cent.

However, this upbeat assessment is tempered with some grounds for caution. In 2010, Qatar did not entirely escape the impact of wider economic problems in the Gulf, particularly in the real-estate business and some parts of the private sector.

Impairment provisioning

To counteract the difficult conditions, CBQ had to set aside QR167m ($46m) in impairment provisions against its loan book and QR128m for its investment portfolio. Nonetheless, it still managed to achieve a 7 per cent rise in net profit.

At Doha Bank, net profit rose 8.3 per cent, while Qatar National Bank (QNB) saw a 35.8 per cent increase in profit and a further improvement in what was already a strong rate of return on equity.

Non-performing loans (NPLs) as a proportion of total exposure rose at QNB, but only to a marginal level of 0.9 per cent.

At Qatar Islamic Bank (QIB), assets rose by 32 per cent to QR51.8bn, while net profit touched QR1.33bn. International Bank of Qatar (IBQ) reported a 34 per cent rise in net profit to QR458m, while Al-Khaliji Commercial Bank saw its profit jump by 155 per cent to QR427m.

The two institutions have announced plans to merge and detailed planning for the move is now well advanced.

“The main trend we have seen in the retail banking sector during 2010 was a material increase in non-performing loans (NPLs),” says Hardy. “This reflected the cooling down of the economy after the ‘boom times’ and think that most of the bad loans have been identified now. This also highlighted the need for more stringent credit risk management policies.”

Compared with Kuwait, Qatari banks have escaped the mass personal debt problems, although many residents have still felt a degree of strain and been forced to cut back on borrowing.

However, the retail market has not been neglected. The major banks have announced a number of service enhancements and new branches to cater for the country’s growing and increasingly affluent population.

Loan growth slows in Qatar

“Loan growth was moderate at 16 per cent and return on average assets totalled a solid 2.6 per cent for 2010,” says Elena Panayiotou, lead analyst for Qatari banks at international rating agency Moody’s Investors Service.

“Profitability was supported by the banks’ healthy interest rate margins of 2.9 per cent and the very low cost structure of their operations. The system’s cost to income ratio stood at a low 25 per cent for 2010.

“Despite some increase in the banks’ problematic loans, mainly relating to consumer debt, asset quality was sustained at good levels. Total NPLs to total loans for the sector remained at a low 2 per cent at the end of 2010, while 85 per cent of the NPLs were covered by loan loss reserves.”

At the lower income end of the scale, the pace of project development fuelled by the 2022 World Cup, will continue to attract migrant workers, particularly from the Indian subcontinent, who will need essential bank services.

Meanwhile, among Qatari nationals and expatriates in executive and senior technical roles, there is increased demand for more personalised retail banking and fee-based services, such as asset management.

“All banks focus on offering asset and wealth management services, which includes personalised banking, private banking services, trust and fiduciary services,” says Panayiotou.

“QNB is the dominant bank in this segment and offers wide private banking products and services to high-net-worth individuals, using  its private banking division in Doha and other major financial centres, including London, Paris and Geneva.”

Banks are particularly keen to attract the growing number of Western expat residents, who are not wealthy, but are certainly well-off. For example, IBQ’s service for those it categorises as ‘elite’ sets an acceptance threshold of a monthly salary of QR35,000, assets of QR350,000 under management and personal loans of QR750,000.

“The expatriate population is serviced by all banks, but is subject to strict lending criteria as the risks are higher in this sector,” says Panayiotou.

New bank products in Qatar

Doha Bank is distinctive for maintaining a twin focus on both the upper and lower income ends of the retail market.

In December 2010, the bank launched a personalised service for higher income customers and for lower income clients. The lender recently reached an agreement with National Bank in Bangladesh on remittance payments.

In 2010, it introduced a special package for Lebanese nationals living in Qatar and has also partnered with telecoms firm Vodafone Qatar to launch a mobile money transfer service.

Another area of the retail market where Qatari banks are seeking to develop more activity is financing for small and medium-sized enterprises (SMEs). This helps banks to diversify risk portfolios away from real estate and consumer credit and make greater use of their local branch networks.

The Qatar Development Bank has cooperated with the banks, both commercial and Islamic, to provide guarantees for SME financing under a scheme known as Al-Dhameen.

For conventional banks, the growth of these diverse activities will be important as they consider how to react to new central bank rules that may force some to withdraw from the Islamic banking arena.

With retail business remaining in a cooling off period as consumers adjust to the end of the property boom of the past decade, project finance will be particularly relevant for banks in the years ahead.

Qatari bankers are optimistic that the years leading up to the 2022 World Cup will produce sustained growth in project and corporate business. There are early reports that government infrastructure spending could reach $100bn over this period, and it is hoped that there will be spin-off benefits for the private sector too.