Qatar banks are caught in the crosshairs of weak oil prices at the moment. until a year ago, they were unstoppable - posting profits, funding projects, acquring banks abroad - but dipping oil prices have been pinching them in recent times. Qatar Today takes a peek at them and their future course of action.

Making profits has been the hallmark of Qatar's banks which were awash with adequate liquidity for many years. They were involved in funding mega projects, played an active role in developing retail banking by sanctioning vehicle and personal loans to thousands of expats who came to the country in droves besides supporting the small and medium-sized enterprises in the country to the hilt.

These banks were probably first among their peers in the world to have met the Basel III stipulations, which will come into effect in 2019, as they maintained adequate capital and liquidity in view of their healthy growth over the years.

"The expansion of operations of Qatar-based banks internationally is in itself an indication of the increasing strength and confidence of these banks to compete with other banks in the international arena." - HE Sheikh Abdulla bin, Saoud Al Thani, Governor, Qatar Central Bank

Challenges ahead
A glance at the latest annual statements of the majority of these banks shows that liquidity is going to be the biggest challenge for them if oil prices do not recover in the next couple of years and they need to take remedial measures so that they do not lag behind when the Basel III norms come into force.

According to the financial statements, the net profits of Qatar International Islamic Bank (QIIB) and Commercial Bank of Qatar have dropped in 2015 compared with the previous year. While QIIB's net profit in 2015 was QR784.2 million compared with QR825.8 million in 2014, the corresponding figures for Commercial Bank were QR1.45 billion and QR1.6 billion, respectively.

Commercial Bank's Vice Chairman and Managing Director Hussain Al Fardan says that the financial results for 2015 were affected by slowing economic growth in the markets in addition to higher than average provisioning taken by the bank's UAE associate. "The fundamentals of our business, however, remain strong and our strategy firm: to continue to build upon our 40-year heritage, further developing a financial institution designed to meet our customers' changing needs," he adds.

A recent report by KPMG in Qatar revealed that combined net profitability of listed banks increased by 4% from the year ended December 31, 2014, as compared with the 13% and 8% growth rates for the prior two years. The collective asset base of all banks has increased by 11% (up by QR110.1 billion) from December 31, 2014, which is primarily due to the increase in lending portfolios by QR105.6 billion (16.3%), although at a lower level than in previous years. This was predominantly due to a gradual acceleration of infrastructure projects as Qatar gets closer to 2022, with growth predominantly from the market and specifically in the corporate sector. Government and government-related entities still account for a significant portion of the assets of listed banks at around 32%, slightly down from the 35% last year.

Whilst deposits grew at 11.2% (up by QR74.7 billion), the 'due to banks' balances had a growth of 28.3% (up by QR22.9 billion) as banks looked to diversify their funding base during the same period. The government and government-related contribution to the deposit base of listed banks actually declined by 4% from the prior year as a result of the economic conditions impacting Qatar and the wider region, which also contributed to the tightening liquidity in the local market, the KPMG report says.

"We think banks will manage their funding profiles more conservatively, which should translate into lower growth. We also expect credit losses will increase given the economic slowdown and the pressure we expect in some sectors, such as contracting." - Fevzi Timucin Engin, Director, Financial Institution Ratings - CEEMEA, Standard & Poor's

Modest results
Partner at KPMG in Qatar and Head of Financial Services for the Middle East and South Asia Omar Mahmood points out that listed banks in Qatar have delivered a modest set of results for the year ended December 31, 2015 compared with the prior year due to challenging market conditions.
"It's undoubtable that the decline in oil prices has had a significant impact across most sectors in Qatar and banks have of course been affected. However, as well as oil prices, there are a number of other issues impacting the industry including geo-political uncertainty, government cost-reduction measures and increasing competition, all of which have contributed to one of the lowest overall profit growth rates in recent years for listed banks in Qatar."
According to him, the reasons for this include margin compression of costs of funds which have come under pressure as banks have been forced to look at market and bank funding, given the fact that the lower cost government deposits are harder to come by as a result of the lower oil prices; impairment in increased investment as market sentiment has been reflected in equity prices as the local and regional stock markets have seen a downward trend; tightening liquidity which has come under significant strain in 2015; and impairment charges on loans and advances which have decreased by 21% year on year. "Without this reduced impairment charge, the overall profits of listed banks in Qatar would have declined year on year," he says.

"It's undoubtable that the decline in oil prices has had a significant impact across most sectors in Qatar and banks have of course been affected. However, as well as oil prices, there are a number of other issues impacting the industry including geo-political uncertainty, government cost-reduction measures and increasing competition, all of which have contributed to one of the lowest overall profit growth rates in recent years for listed banks in Qatar." - Omar Mahmood, Partner and Head of Financial Services, Middle East and South Asia, KPMG, Qatar

Market sentiment also appears to be correlated with the fundamentals, as the share prices for all but one listed bank exhibited a downward trend in line with the overall stock market. It is also of note that the share price of the five conventional listed banks has on average declined by a far higher percentage (20.6% decline) when compared to their three Islamic counterparts (8.6% decline) - a possible reflection of the greater market optimism in the Islamic banking sector.

Mahmood explains that despite slower growth in 2015, the country can remain optimistic: "Despite concerns over the global economy, lower oil prices, and continued regional unrest, Qatar's economy remains robust, backed by the country's strong reserves and the government's commitment to planned non-hydrocarbon projects, as well as a robust regulatory regime, all of which we expect to have a positive impact on the banking sector in the medium to longterm." The banks will continue to explore international expansion opportunities in the region and outside to help achieve their strategic growth plans, particularly given the constraints noted above, and tap into the increasing number of trade corridors to and from the region. "We expect there to be a continued trend to raise additional longer-term funding and capital, as higher Basel III capital adequacy requirements come into force in a phased manner and banks look to exceed the minimum requirements to fund expansion plans," adds Mahmood.

Qatar Central Bank (QCB) Governor HE Sheikh Abdulla bin Saoud Al Thani said that the global expansion of Qatar's banks is in itself an indication of the increasing strength and confidence of these banks to compete with other banks in the international arena. In an interview with The Business Year, he said that QCB was ensuring that the expansion should be prudential. Limits have been fixed on the foreign currency gap. The ratio of foreign currency asset to foreign currency liability of each bank should be at a minimum of 100%.

This means that short positions are not allowed, but long are allowed. "More importantly, QCB has been in the forefront in implementation of Basel III requirements. The capital adequacy is being monitored at both solo and consolidated levels. The strength of the banks is also reflected in their ability to meet Basel III requirements with excess capital buffers and low levels of NPLs despite the persistence of low oil prices," he added.
He has a point to score as Qatar National Bank announced last December purchase of National Bank of Greece's stake (99.8%) in its Turkish unit Finansbank for $2.95 billion (QR10.74 billion). The bank will finance the purchase with its own funds and will remain strongly capitalised after the acquisition.

"This transaction is a significant milestone in QNB's vision to becoming a Middle East and Africa icon by 2017 and a leading global bank by 2030," said Group Chief Executive Officer Ali Ahmed Al Kuwari.

"With Iran looking for external funding to take up infrastructure projects worth billions of dollars, Qatar's banks could explore the possibility of project funding in and trade finance with Iran." - Andreas Schweitzer, Co-founder and Vice Chairman, Acquarossa Terme SA, Switzerland

Tight liquidity
In its report "Qatari Banks' Profitability To Wane In 2016," Standard & Poor's Ratings Services said that Qatar's banks were likely to face tightening liquidity, slackening credit growth and weakening profitability during 2016. Although the drop in hydrocarbon prices and the government's streamlining of its public investment programme are putting the brakes on the domestic economy, banks' asset quality held generally steady while credit growth remained resilient on the back of strong private sector activity in 2015, the report said.

Director, Financial Institution Ratings - CEEMEA at Standard & Poor's Timucin Engin says that the operating conditions for Qatari banks will toughen this year, denting their profitability. The Qatari public sector withdrew some of its deposits from the domestic banking system in the process in 2015 and the agency expects more of the same in 2016 and foresees a further squeeze on banks' liquidity. Further trimming of government spending will likely reduce private-sector lending opportunities.

"We think banks will manage their funding profiles more conservatively, which should translate into lower growth. We also expect credit losses will increase given the economic slowdown and the pressure we expect in some sectors, such as contracting," adds Engin.

Iran's market
With local markets already saturated and not presenting much opportunity, banks in the Middle East including those in Qatar are, due to geographic proximity, looking at Iran, which is planning to take up projects worth $200 billion in the coming months after all sanctions are lifted by the US and other countries.
 
While Qatar National Bank already has a representative office in Iran, Emirates NBD, Dubai's largest lender, is in talks with prospective clients in that country and seeking legal opinion on entering the Persian Gulf state.

"Qatar's banks should consider to explore the Iranian market as the Western powers have lifted sanctions after both sides reached a nuclear deal in July last year," says Andreas Schweitzer, an active investor in Iran since 2009. Schweitzer, who serves on the board of directors of various Iran-focussed investment and advisory companies, in particular Arjan Capital Ltd, says that this was because the European Union (EU) banks are still hesitant to do business with Iran as only the EU and the United Nations have lifted sanctions while the so-called secondary American sanctions continued against Iran for violation of human rights and also for aiding and abetting terrorism. "With Iran looking for external funding to take up infrastructure projects worth billions of dollars, Qatar's banks could explore the possibility of project funding in and trade finance with Iran," says Schweitzer.

Besides social infrastructure, Iran is also looking for foreign investors investing their money for upgrading the technology in its oil and gas industry, the energy sector and, much needed, hospitality, adds Schweitzer.

Expressing similar opinion, Senior Partner with Dubai-based Arjan Capital and investment banker Nicholas Masoud Gilani says that not only Qatari banks, but also, all regional banks in MENA and India should explore entering the highly lucrative Iranian banking market.

"By entering the virgin Iranian markets (as far as foreign banks are concerned), Qatari banks would be able to tap into a geographical area, close to their home fronts, which is unexplored and ripe for potentially significant returns. And that area is Iran," he says.

"By entering the virgin Iranian markets (as far as foreign banks are concerned), Qatari banks would be able to tap into a geographical area, close to their home fronts, which is unexplored and ripe for potentially significant returns. And that area is Iran." - Nicholas Masoud Gilani, Senior Partner, Arjan Capital

The potential sectors in Iran which the Qatar's banks can explore include trade finance, corporate lending, project finance (extremely profitable especially in sectors such as hospitality, energy and petrochemicals and office buildings), debt capital markets, equity capital markets (listing of Iranian corporates on non-Iran exchanges) and wealth management targeting the Iranian diaspora, says Gilani.

However, the banking sector in Iran suffers from two main challenges like non-performing loans (NPLs) and inadequate capital as many Iranian banks are not Basel II and Basel III-compliant.

The Tier 1 capital of many Iranian banks is weak. "Foreign banks, those that are well capitalised, could enter the Iranian market either through joint ventures or enter independently through the mainland or through the Kish Island Free Zone. The Kish Island Free Zone affords foreign banks the choice of engaging in conventional banking where they do not have to operate under the Islamic sharia," explains Gilani.

© Qatar Today 2016