The Qatari banking sector is entering a new phase of high growth in 2008. In its latest report, Global Investment House (GIH) believes that banking penetration in Qatar has been accelerating over the last few years. GIH states the ratio of credit deployment to GDP has increased to 49.6% at the end of 2006, and is estimated to have hit 69.1% in 2007 due to deceleration in the country’s overall GDP growth rate. Diversity and expansion top the Qatari financial sector’s list of strategic economic priorities.
Economic growth has been augmented with proactive macroeconomic initiatives. Qatar continues to adopt and implement new regulations, with the aim to “make the investment environment more investor friendly,” according to GIH. In addition, Qatar has made several positive moves to attract foreign investors, as exemplified by the creation of the Qatar Financial Center (QFC). It acts as a national institution seeking to draw “international financial institutions and multi-national corporations to set up their offices and to forge closer partnerships with international business houses.” QFC offers quite an appealing package to foreign entities, giving them a three-year tax holiday, full repatriation of profits, as well as 100% foreign ownership.
In its extensive efforts to widen its economic base, Qatar launched a remarkable domestic investment program. This recent development is aimed at diversifying the country’s economic base from the hydrocarbon sector. GIH reports that Qatar is most likely to spend around $140 billion on various projects over the next five to six years. The banking sector would be one of the chief beneficiaries of this project scale and regional diversity agenda.
Qatari banks are also focusing on expanding their capital base, since many banks have voiced their intentions to come out with rights issues in 2008 and 2009. This step will not only aid banks in shoring up their CAR and swaying their balance sheets, but it will also help the banks tap into Qatar’s incoming profitable lending opportunities.
In light of all these reforms and strong finance performances, Standard & Poor’s has upgraded Qatar’s sovereign rating to ‘AA-‘ from ‘A+’. GIH highlights that Qatar is planning to bring its financial sector under one integrated financial regulatory body. “With this initiative,” GIH explains, “Qatar follows an international trend towards an integrated approach to the regulation of different financial services products and activities.” The Qatari government is also ardently focusing on developing other economic sectors, to further boost the country’s economic growth.
Generally, the structure of banking sector has been altered further as commercial banks have dived into Islamic banking. Now, in order for the domestic market to face the changing facets of the industry, several local banks are concentrating on regional expansion via acquisitions and opening new branches across the Gulf. The country’s leading bank, Qatar National Bank (QNB), and Doha Bank (DB, the third top bank) are focusing on regional branch expansion. In contrast, the Commercial Bank of Qatar (CBQ) — the second-largest bank in the country — and newly established Al Khaliji Commercial Bank are both directing their expansion strategies to acquisitions in order to amplify their foothold in the region. GIH considers this strategy as headed “in the right direction as it will bring diversification in the asset class of Qatari banks.”
Total assets of Qatari banks ($ billions)
Bank Performance
With a total of 17 banks, nine banks are Qatari owned, while seven are foreign banks, and the last is a specialized government-owned bank. Of the nine national banks, six are commercial banks — namely Al Khaliji Bank, Al Ahli Bank, Commercial Bank, DB, International Bank of Qatar and QNB — while the remaining three are Islamic institutions. Locally owned banks account for approximately 80% of the banking sector’s assets.
Last year was exceptionally prosperous for all banks listed in Qatar, as each bank’s balance sheet witnessed significant increases. CPI Financial reports that, “the aggregate balance sheets of all the listed banks grew by 61 percent in 2007 to $69.2 billion from $43.1 billion in 2006.” Aggregate assets of all banks in Q1 of 2008 saw profits grow by 15.1% to $76.7 billion, up from $69.3 billion at the end of 2007.
From $1.4 billion in 2006, the combined net profit of all banks operating in Qatar grew by 56% year-on-year in 2007, coming to a total of $2.2 billion.
In efforts to hold back accelerating consumer lending, Qatar Central Bank (QCB) published a directive explaining that personal loans will be limited to a maximum of QR 2.5 million ($687,000), and that the payback period must not surpass seven years. The directive also mentioned that the total cost of the loan repayment is limited to 70% of an individual’s salary. All leading banks in the country are following directives issued from the central bank, with the country’s top three banks paving the way for expansion
QNB is currently Qatar’s largest operating bank. Partly government-owned, the bank holds over 55% of total deposits and handles most of the government’s business. By the end of 2007, QNB’s total assets stood at $31.41 billion. With already two branches in Paris and London, last year the bank further achieved significant regional expansion, opening new branches in Yemen, Oman, and Kuwait, increasing the number of the bank’s overseas branches to five. QNB also has representative offices in Iran, Libya, and Singapore. The bank has acquired a 30.5% share in the Jordanian Housing Bank for Trade and Finance (HBTF). The bank is highly esteemed for its successful participation and completion of the region’s largest and most competitive syndicated loan, amounting to $1.85 billion. GIH comments that QNB is viewed as “one of the best banks in Qatar considering its sound assets portfolio, which we believe will continue to remain its main focus area despite significant growth in its loan portfolio over the last few years.” With such vast operations and rapidly growing assets, QNB makes it difficult for other banks to compete.
As the second leading bank, CBQ’s assets stood at $12.47 billion at last year’s end. Like its competitors, the bank is actively expanding its operations, exemplified by its 35% purchase of the National Bank of Oman in 2005 and most recently acquiring a 40% stake UAE-based United Arab Bank. CEO Andrew Stevens believes strong performance of Q1 2008 is “a reflection of the continued favorable economic conditions being experienced in Qatar. In the first three months of this year, CBQ’s total assets rang in at $13.4 billion, compared to $8.7 billion at the end of Q1 in 2007. The performance of National Bank of Oman and United Arab Bank, in which we own interests of 34.85% and 40% respectively, continues to be extremely encouraging.” Steven went on to highlight that CBQ aims to ensure that it has “a capital base sufficient to cope with future growth, both organically and through acquisitions, to meet the requirements of Qatar Central Bank and the ratings agencies, and the returns expected from [its] shareholders.” Following the trend, CBQ is focused on developing healthy customer franchises and expand its scope of operations.
In third place is Doha Bank, with total assets measured at $8.3 billion. The bank is highly profitable, what The Peninsula reports as being partly attributable to its leading position in the comparatively high margin retail segment. Alongside its peers, DB has witnessed swift growth under Qatar’s enjoyable and buoyant economic conditions. The Peninsula notes that, “this is, however, asserting negative pressure on liquidity and capital indicators, which are both at acceptable levels.” Like its fellow banks in expansion efforts, the bank is planning to open a branch in Kuwait sometime this year. In general, DB is successfully expanding internationally and its performance remains sound.
Market share of total assets 2007
Growth in balance sheet
Market share of total deposits 2007
Growth in loans & advances
Inflation
Like most of its fellow GCC members, Qatar still pegs its currency to the falling American greenback. The dollar peg, along with soaring oil and rent prices, has caused Qatari inflation to hit a record high of 14.81% in 2007. According to the General Secretariat for Development Planning rent and utility costs increased by 27.7% in Q4 of 2007. As the country diversifies its economic base, inflation rates are expected to drop slightly to around 13% in 2008.
Currently, Qatar is looking into policy options to battle inflation, including the possibility of dropping its peg to the dollar. Youssef Hussein Kamal, Qatar’s Minister of Finance, told Reuters in January 2008 that the government has plans to sell bonds in order to mop up some liquidity, build more affordable homes, and control building material prices so to tackle swelling prices.
Basel II
Supervising the financial sector, Qatar Central Bank has introduced numerous regulations in tune with international standards. The most influential of such regulations is the Basel II accord. Most banks in Qatar and in the region as well, are putting in efforts to implement Basel II in order to raise the bar for the financial sector. QCB is responsible of ensuring that banks remain in line with the accord. This regulatory framework is sure to guide banks in enhancing their performance.
Forecast
Regional investment bank EFG-Hermes believes that Qatar’s banking sector is sure to benefit from its mushrooming gas market and rapidly growing knowledge industry. “With the economy booming from government-directed investment and the initiation of over $120 billion of gas, infrastructure and other major development projects, Qatar, and indeed the local banking sector, has a very solid outlook,” explained Raj Madha, Director of Equity Research at EFG-Hermes.
Madha predicted that real GDP growth will reach double-digits, whilst inflation is anticipated to fuel nominal growth into the high teens. “The impact on the local banking sector is clear — lending growth has averaged 42% per annum for the last three years to October 2007 and, although this is slowing, we anticipate this trend to continue for some time”, Madha said. With exceptional performance on their record, banks in Qatar are expected to further flourish.
In short, the outlook for Qatari banks is stellar. CPI Financial trusts that Qatar “has huge investment potential.” Madha added that, “for the foreseeable future, we believe Qatar’s prospects are bright — strong loan growth, driven by a strong economy, driven by massive liquidity and investment.” Without question, there is a tremendously bright future ahead for the Qatari banking sector.
Country forecast
