Qatari banks' profitability is likely to remain "strong" over the next 12 months, even as risks remain on "structural mismatches" in their balance sheets, credit concentration and the country's heavy reliance on hydrocarbons, according to global credit rating agency Standard & Poor's (S&P).
Qatar's banking sector has been classified under Group '4' (the fourth-lowest risk category on a 1-10 scale) under S&P banking industry country risk assessment criteria.
"High interest margins, although contracting; briskly increasing business volumes mainly on the back of the government's investments; and banks' generally low cost bases are the main factors fuelling this performance," S&P credit analyst Mohamed Damak said in a report.
In this largely favourable environment, and given the solid economic growth, S&P said "we forecast in Qatar over the next few years, lending will continue to increase by about 10%-15% per year."
S&P considered the strong economy, which will support business volumes. But in the less lucrative segment of government-sponsored projects, the drop in yields on Qatari government bonds over the past three years and banks' replacement of these holdings and stiff price competition on the deposit side, banks are offering higher prices to attract and retain large corporate deposits inside Qatar or from other GCC countries.
On the risks, it said the normalisation of interest rates in the US within the next two years could be the most immediate damper on banks' profitability.
"A steep increase in the US interest rates could squeeze Qatari banks' interest margins because of the structural mismatch of their balance sheets, which carry long-term assets and short-term deposits," it said.
Highlighting that the current structure of Qatari banks' revenues and the short duration of their liabilities leave them exposed to the risk of an upward revision in the monetary policy steering rate in Qatar, it said "we think a 100 basis-point increase in interest rates will push profits of the Qatari banks we rate down by about 9% on average."
Mirroring the small size of the economy, it said high single name and real estate sector concentration expose Qatari banks to the tail risk of default of top names or to setbacks in the real estate sector.
Like other banks in the GCC, Qatari banks' loan portfolios remain heavily concentrated on large borrowers, the report said, adding the top 20 loans represented almost 45% of total loans on average at year-end 2013.
During the 2009 real estate correction, though, the government shielded the banking system by providing "significant and timely" support. In addition, banks' increasing appetite for geographic expansion in riskier countries could weigh on their financial profiles and performance, it added.
However, over the past three years, there has been a slight increase in Qatari banks' cost of risk because of additional provisions on loans to contractors and real estate developers and the cost of cleaning up Qatari banks' newly acquired affiliates outside Qatar.
Moreover, S&P noted that Qatari banks' capitalisation has not benefited from their strong profitability, due to their very aggressive dividend policies compared with other GCC banks.
Observing that heavy reliance of the Qatari economy as well as the government accounts on the large oil and gas sector exposes the country to a sudden and persistent drop in oil and gas prices, S&P said under such a scenario, the banking system could suffer through its exposures to large investment projects or to the expatriate retail segment.
"That said, we do not currently expect such a fall to occur within the next 24 months. For 2014 and 2015, we assume oil prices will remain above $95 per barrel," it noted.
© Gulf Times 2014
