There is no clearer indication of the strength and health of Qatar’s banking sector than the fact that all Qatari banks were exempt from the recent raft of ratings downgrades that hit other Gulf banks in January this year.

While many GCC banks have posted a large drop in their profits for 2008, Qatari banks recorded a positive financial performance overall. The profits of Qatar National Bank (QNB), the largest bank by market share (54.4 per cent), increased by 45 per cent in 2008, while its total assets rose by 33 per cent to $41.7bn. Meanwhile, Commercial Bank of Qatar’s net profits grew by 22.4 per cent to $470m and its total assets increased by 35 per cent to $16.8bn.

These results are, in part, a reflection of the banks’ limited exposure to sub-prime and related assets. But the Qatari banking sector is not immune from the impact of global events. A closer examination of the banks’ balance sheets reveals that profit margins are starting to be hit, albeit on a lesser scale than the losses recorded by other regional banks – for example, Kuwait’s Gulf Bank is estimated to have lost $1.4bn as a result of derivatives trading in 2008.

For QNB, while profits in 2008 rose to $1bn, it reported a 0.8 per cent fall in profits for the fourth quarter, from $179.3m to $178.6m, compared with the same period the previous year.

Falling deposits

Although the bank’s full accounts for 2008 have yet to be disclosed, analysts at the Netherlands’ ING Bank say QNB could have suffered investment losses of $411m in the fourth quarter of 2008 alone.

QNB’s results are representative of the continued difficulty for Qatari banks in securing deposits, with loans and advances growing by 51 per cent in 2008, to $27.5bn, but deposits growing by just 31 per cent to $28.6bn. Investors remain deterred by the low interest rates on offer.

“[The fact] that loan portfolios have been growing at a much faster rate than the deposit portfolio is a common phenomenon for most banks,” says George Nasra, managing director of International Bank of Qatar (IBQ).

Economists say the biggest challenge facing the Qatari banking sector is that most of the banks have reached the Qatar Central Bank’s (QCB) maximum 90 per cent regulatory loan-to-deposit ratio, which prohibits them from lending more than 90 per cent of the value of their customer deposits.

Figures show that between January 2005 and November 2008, loans in the banking system grew by 47 per cent, while customer deposits grew by just 36 per cent. This has effectively put a brake on further lending until new deposits are made.

“Even before the global financial crisis, there was a shortage of customer deposits, so the crisis exacerbated this imbalance,” says Nasra. “The market for customer deposits today is very tight, so the cost of loans is increasing.”

At the end of 2008, analysts were reporting the start of a price war to attract deposits. Interest rates on Qatari deposits now average about 5.5-6 per cent, which is disproportionately high, given that interest rates on the dollar, to which the Qatari riyal is pegged, are close to 1 per cent.

In an effort to limit the impact of the global downturn on Qatari banks, the QCB introduced a series of measures in 2008 to ensure local banks were not overexposed to real estate, which has already been hit hard by the downturn and is expected to go through a major correction in 2009.

Safeguarding investments

Local banks are now forbidden from extending more than 15 per cent of their equity as finance to real estate, and a mandatory deposit of up to 35 per cent will be required for customers seeking mortgage financing from local banks.

To further shore up the country’s financial sector, the Qatar Investment Authority (QIA) announced in mid-January that it had bought 5 per cent stakes in seven Qatari banks listed on the Doha Securities Market.

The move is seen by some as a sign of the government’s willingness to back Qatar’s banks with public money, but it inevitably raises the question of whether the QIA’s support is symptomatic of a perceived weakness in the sector.

“The equity injection has two purposes,” says Reji Joseph, director of corporate finance at US consultant KPMG in Doha. “The first is to enhance the capital position of the banks; the second is to send a signal about the government’s commitment to continue to back these institutions in such times.

“The fourth-quarter results for major banks in 2008 were substantially lower than the rest of the year, so the support is timely.”

A total of 17 banks operate in Qatar, nine of which are Qatari institutions, including six commercial banks – Ahli Bank, Al-Khaliji Bank, Commercial Bank, Doha Bank, IBQ and QNB – and three Islamic institutions – Masraf al-Rayan, International Islamic and Qatar Islamic Bank.

The QIA bought stakes in all of these apart from IBQ, which is a private bank, and QNB, in which it already has a 50 per cent stake.

News of the QIA’s plans to acquire these stakes first came to light in October 2008 when it launched a $5.3bn plan to buy 10-20 per cent of locally listed banks’ capital to boost investor confidence in the banking sector.

The recent spate of 5 per cent acquisitions is understood to be the first phase in a two-phase subscription process. The second phase is scheduled to start in December 2009, at the same rate of 5 per cent.

“The QIA has deliberately staged the investment in order to not provide too much of a comfort zone, so that banks still go ahead and restructure, re-evaluate their current operating model and seek efficiencies in this fast-changing environment,” says Joseph.

“At the same time, the commitment that further funds are available eliminates some of the concerns about capital flows at the end of the year, by which time the financial crisis will have fully manifested itself in the region and will be better understood.”

State intervention

There are currently no plans to go beyond this second phase of the subscription process and, according to Nasra, the reason the QIA scaled back its proposed acquisitions from a possible 20 per cent to 10 per cent is that the banks are already over-capitalised.

“None of the banks need 20 per cent,” says Joseph. “Look at Commercial Bank, which went through a very large rights issue last year.”

In July 2008, Commercial Bank issued 24 million new ordinary shares, at a price of $37.50 a share, to raise capital. This was the largest globally distributed global depository receipt issue to come out of the GCC region, and significantly strengthened the bank’s capital ratios.

However, with liquidity tightening across the region, the QIA’s backing is boosting confidence in Qatar’s banks.

As US investment bank Merrill Lynch notes in a report published at the end of 2008, while Qatari banks are still in a “comfortable liquidity position” and are “less exposed” to the retrenchment of external liquidity than those in the UAE, Qatar’s banking sector liquidity has clearly tightened since the first half of 2008.

Indeed, domestic liquidity reached an all-time high of $41.2bn in mid-2008, up 27.5 per cent on 2007. “With the capital injection, banks hopefully will not need to take desperate measures to sell assets at huge discounts or refinance at huge rates,” says Joseph.

While government intervention will play a key role in bolstering banks’ lending capacity, it is clear that the main engine of growth for Qatari banks will continue to be the state’s growing economy. The scale of planned projects means developers and contractors alike will need long-term project financing, and the QIA’s cash injection for the banks will help boost lending.

Qatar has the fastest-growing economy in the GCC. Indeed, Simon Williams, economist at UK bank HSBC, forecasts it will have a near double-digit GDP growth rate in 2009, against a Gulf-wide average of 2 per cent or lower.

In a report published in mid-December, Saudi Arabia’s Samba Financial Group predicts that Qatar’s economy could grow by 10.3 per cent in 2009, not much lower than the average 11 per cent real GDP growth rate of the past five years, making it potentially the world’s fastest-growing economy and one of the few nations in the world with a double-digit growth forecast for 2009.

However, this is a significant decrease from the 19.6 per cent growth rate Samba originally forecast for this year, as the downturn causes project delays and cancellations. “The price of oil this year will dictate how much public spending there is and how many projects go ahead,” says one Doha-based economist.

However, the depressed global oil price is not such a great concern for Qatar, which is now the world’s largest liquefied natural gas (LNG) producer. LNG output capacity is on track to double to 77 million tonnes a year by 2010.

Six new LNG trains with a capacity of 7.8 million tonnes a year combined are expected to become operational in 2010, increasing Qatar’s capacity to export gas worldwide.

“Qatar is less exposed than other Gulf oil exporters to changes in oil prices as its increasing LNG exports are based on a variety of long-term contract prices that vary in their relationship to oil prices,” the report says.

The expansion of Qatar’s LNG exports is now considered to be the fundamental driver of its economic growth, and both the long-term contracts and the new lines of LNG becoming operational in the near future will provide a significant revenue boost that should help keep the fiscal and current account balances in surplus in the coming years.

The 2008-09 Qatari budget forecasts total revenues will increase by 42.6 per cent to $28.36bn, with total expenditure expected to increase by 45.9 per cent to $26.3bn by the end of the financial year. Public services and infrastructure will receive $8.4bn of this, accounting for 51 per cent of the total allocations for major public projects.

Although Qatar’s budget for 2009-10 has not yet been approved, preliminary indications are that it will be another year of multi-billion-dollar expenditure.

With Qatari banks enjoying the benefits of the state’s cautious regulation of their lending ability and the backing of the QIA, the outlook for the banking sector for the year ahead is good compared with neighbouring Gulf states. Lending is still constricted by the strict ratios in place, but there is nonetheless an appetite among Qatari banks to lend to long-term projects that are part of the state’s massive public spending programme.

Once again, Qatar’s combination of a small population, huge state revenues and prudent regulation have come together to support the country’s banks during difficult times for the sector in the wider region.