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Qatar – A pearl of prudence

Banks limiting liabilities and focusing on profitability in home market

by Executive Staff

Watching their regional counterparts struggle to stay afloat, banks in Qatar are making very calculated and prudent moves this year. While the global financial turmoil has not hit the Qatari banking sector as hard as other GCC nations, bankers and analysts alike are expecting the ripple effect of the crisis to arrive sooner than later. Fortunately, most banks in the pearl of the Gulf did not invest heavily in structured products or toxic assets — as many other banks in the region did — which has helped Qatar avoid major a fallout in its small, yet robust, banking sector.

With a predicted real GDP growth of around 8.5 percent in 2009, today Qatar is one of the fastest growing economies in the world. As global markets face an indefinite period of recession, many investors are looking for financial safe havens. With its diverse and relatively peppy economy, Qatar hopes bankers and investors will continue to flock to the country and help it achieve financial supremacy over its oil-poor neighbors Bahrain and Dubai. With many multi-billion dollar projects spanning numerous industries in the works, the banking sector would be a major beneficiary of such developments. Unfortunately, due to the global economic slowdown, many of those projects are expected to be delayed or cancelled, leaving banks to feel the blow in their loan portfolios. But thanks to major diversification strategies, banks in Qatar are believed to be well protected against any aftershocks the global meltdown could send their way.

Sovereign serenity
Despite the inevitable slowdown in growth, with the affluent government standing behind its economy all sectors are expected to perform adequately this year. The resilience of the banking sector, according to Mohamed Damak, a rating specialist in financial services at Standard & Poor’s, is “above average,” which is “mainly due to the combination of lower exposure to structured investment products” and the proactive role taken by the Qatari government. For example, in the fourth quarter of 2008, the Qatar Investment Authority (QIA) announced its plans to acquire between 10 and 20 percent ownership in every local bank — of which there are 11 total — helping to increase confidence across the banking sector and to boost liquidity conditions in the market. More recently, at the end of March 2009, the government purchased $1.8 billion worth of local banks’ investment portfolios in order to share the burden of such funds, revive lending, boost liquidity and to support the economy.
While this latest act has been welcomed with open arms by banks across the country, Raj Madha, director of equity research at EFG-Hermes in Dubai, points out “the reality is this is essentially a free gift from the government. It does have the negative impact of encouraging risky behavior on the basis of relying on the government to act as a backstop. However, given the very unusual nature of the current global situation, it may seem reasonable to make an exception on this occasion.”
Still, Madha views this “start of greater intervention from the government” as “positive for valuations, underpinning that the government stands behind the [banking] sector in case of a blow up. Clearly,” he cautions, “this creates some moral hazard, but this is not really the market to be worrying about moral hazard and perverse incentives.”
Abdulbasit A. Al-Shaibei, chief executive officer of Qatar International Islamic Bank (QIIB), believes that this move “is a prudent strategy [by] the government of Qatar,” while calling the sovereign’s decision — unsurprisingly — “generous” toward local banks.
But, Madha highlights, one must not forget that “credit portfolios are still exposed” and the government’s purchase of investment portfolios “has no impact on loan provisioning.” As far as the central bank’s role is concerned, the majority of observers seem to be quite content with how well the institution is managing its banking sector.
Elena Panayiotou, an analyst at Moody’s Investors Service, trusts that Qatar Central Bank (QCB) “aims to exercise sufficient prudential control and supervision of the local banking sector and to harmonize Qatari banking regulations with international standards, as well as to address specific risk areas.”
Damak reiterates this sentiment, saying, “the [QCB] is hands-on with risk issues, meaning they are aware of the different risks and they tend to be proactive when dealing with risks.” In general, Damak — like Madha — sees the “interventionist” attitude of the government as a positive thing. In the event of an emergency, he believes, Qatari banks can expect to “see some kind of extraordinary support.”
Overall, there is no disagreement about the supportive role played by the Qatari government toward its banking sector. Yet, despite the copious sovereign support, “the main issue will be whether the government spending will take up the slack from slower growth in the private sector,” warns Madha.

Home is where the heart is
Before the international financial crisis began, banks around the world — Qatar included — were looking abroad. Whether it was for cross border investments, lending or general expansion, Qatari banks “were a bit aggressive in terms of going abroad,” notes Al-Shaibei. In 2009, he says, “Qatari banks will focus more on the local market [and] concentrate on strengthening their equity base.”
Over the past five years, contends Damak, banks have been “growing tremendously.” Qatar National Bank (QNB), Commercial Bank of Qatar (CBQ) and Doha Bank (DB) alone have witnessed a growth rate of 43.2 percent in 2008, Damak discloses.
Madha agrees, saying that last year “was all about growth and finding new areas to expand the balance sheet into. This year, growth is almost a bad word, with banks focusing primarily on profitability.”
Panayiotou emphasizes “a slowdown in the Qatari banks’ business growth, reflecting the current global economic environment, the tightened funding conditions both domestically and internationally, [as well as] the banks’ more risk-averse behavior.” Strategically, banks will have to “apply more prudent lending policies, particularly in the retail sector as consumer indebtedness in the country rises and as the risk element of the segment increases,” she adds. According to Moody’s data, Panayiotou explains, personal loans have one of the highest delinquency rates in the entire Qatari banking system.
Robert Thursfield, a director in the financial institutions group at Fitch Ratings in Dubai, chimes in saying that “lending growth is likely to be slower” this year in the Qatari banking sector.

Risky business
Due to the declining property market in Qatar, banks will indubitably be adopting a shrewder attitude towards developers and customers alike. Even though the Qatari property market conditions are not nearly as severe as those in Dubai, it is still a crucial concern for the banking sector. Mortgage lending will witness a significantly more conservative approach, insists Damak, as “the expected decline in property prices will have some manageable effects on the Qatari banking system… and the fact that some of the projects will be delayed or cancelled will translate into lower opportunities for growth going forward.”
Al-Shaibei admits, “Of course, we will get hit because of the drop in property prices.”
Panayiotou illustrates the deteriorating real estate situation in the country, saying “a further decrease in demand in the Qatari property market will lead to slower growth in the financing of the construction and the real estate sectors in the country.”
Luckily, Al-Shaibei insists, “everything will be manageable. [The real estate issue] is not going to get out of control.” All local banks are heavily dependent on government projects, so thankfully for them the sovereign’s damage control should be sufficient to deal with any property contractions. Bank growth is also expected to slow due to continued declining liquidity.
Liquidity in the Qatari banking sector is currently adequate, but like in every other economy around the world, it is expected to tighten significantly as the crisis unfolds. Experts unanimously agree that liquidity has been declining in the Qatari banking system lately. The extended and unknown period of global distress is, explains Panayiotou, “expected to lead to a tightening of the banks’ liquidity levels, particularly as funding conditions in Qatar and in international markets continue to be challenging.”
This year, banks in the country will be targeting lower growth than ever before in order to preserve liquidity in the long run and to achieve realistic profitability goals. In terms of balance sheet growth, Madha says, “Qatari banks are now reducing their expectations to low double digits, from the stratospheric levels we saw in 2006 through 2008. This will require some shift in mentality, with banks being much more selective about providing credit.”
Damak asserts that this year, “preserving liquidity and asset quality indicators” will be top priorities on the agendas of local banks.
Seeing as banks are prominently dependent on customer deposits, there is “[f]ierce competition in Qatar in attracting deposits, together with the challenging conditions in the inter-bank and wholesale markets, [which] is likely to put pressure on banks’ funding and liquidity levels going forward,” voices Panayiotou. The good news, she proclaims, is that Moody’s’ concerns “are partly mitigated by the government’s strong financial position and its significant and growing contribution to the Qatari banks’ funding base.”
Another risk, noted by both Panayiotou at Moody’s and Damak from Standard & Poor’s, is the banks exposures to the Doha Stock Market (DSM). Damak warns that Qatari banks will have “some exposure to the stock market and with this decline we will see some one-off effects on profitability if the stock market is not stabilized during the remaining quarters [of 2009].”

What to do
In order to avoid financial catastrophes, Qatari banks will have to act preemptively on a number of fronts. First and foremost, banks must maintain, if not boost, their current liquidity conditions in order to safeguard themselves from future crises in either global or local markets. Secondly, banks should be cautious with provisioning and balance sheet security. Damak stresses the need for calculated risk management, as the international operating environment is clearly not as favorable as it used to be. Also, he says, taking good care of credit and funding is important to banks’ success and protection in the current circumstances. Panayiotou draws attention to the banks’ “need to identify and finance clients that provide good returns with relatively low risk profile, while at the same time ensuring that they take early remedial actions in cases where delinquency rates of existing clients start to rise.”
Prudent moves and preventative measures are the safest best for Qatari banks in 2009. To date, Qatar’s banking sector has been able to avoid any major hits on its domestic front from the global financial crisis, but symptoms of the downturn are likely this year with anticipated slower growth and tightened liquidity conditions.

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Executive Staff


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