Qatar banks’ outlook stable

08/07/2015 09:48 AST

DOHA: Robust government spending will enable Qatari banks to maintain their strong financial metrics, including strong earnings, sound capital buffers and low levels of non-performing loans (NPL) in the next 12 to 18 months, Moody’s Investors Service noted yesterday.

The ratings agency that forecast a stable outlook for Qatar’s banking system, however, noted Qatari banks’ strengths will be moderated by funding pressures owing to reduction in the flow of government deposits, increasing dependence on confidence-sensitive capital market funding and continued high concentrations of loans and deposits.

Moody’s projects that Qatar’s real GDP will expand by seven percent in 2015 as a combination of vast sovereign wealth funds, which is an estimated 147 percent of its GDP, and a relatively low fiscal breakeven oil prices will help the government maintain its extensive public spending programme. Government spending is expected to translate into 10.7 percent growth in the non-hydrocarbon sector, offsetting weakened liquefied natural gas (LNG) output and fostering domestic loan growth of 10-15 percent.

“The strong operating environment coupled with the large proportion of high quality government-related loans held by Qatari banks and the evolving prudential regulation, will support asset quality over the outlook horizon. As a result we expect system NPLs to remain around a low 1.5 percent to two percent of gross loans over the next 12-18 months, said Nitish Bhojnagarwala, Moody’s Assistant Vice-President.

Despite expecting a stable asset quality performance, Moody’s note that Qatari banks will remain exposed to event risk over the outlook horizon, owing to high single borrower concentrations and the limited transparency of large private sector companies.

Qatari banks are also expected to face funding declines as lower oil prices reduce the flow of deposits from the government and it related entities-the largest depositors in the system. Recently introduced regulatory limits on the ratio of gross loans to deposits will pose additional funding pressures. In response, Moody’s expects the banks to increase their reliance on longer term and costlier market funding to support growth over the outlook period.

The ratings agency projects that banks’ balance sheet will continue to grow, supporting domestic economic environment and foreign expansion. While Moody’s expects that capitalization levels will remain solid, they will likely decline slightly, with the tangible common equity to risk-weighted assets a ratio in the 15 percent-17 percent range over the outlook horizon.

Qatari banks are among the most profitable in the GCC, reflecting their rapid credit expansion and robust operating conditions. The banks’ asset quality is among the strongest in the GCC, as indicated by system NPLs of around 1.6 percent of total loans as of December 2014. The coverage of NPLs by loan loss reserves at 104 percent as of December 2014 is moderate compared to regional peers.

In addition to the strong operating environment, Qatari banks’ strong asset-quality performance reflects the extent of system credit extended to high quality government-related entities Overall, NPLs have remained stable over recent years but borrower defaults in the corporate sector have meant that problematic exposures in this sector have trended upwards since 2010. Extensive government borrowing has subdued the overall

NPL levels and masks a low but increasing impairment trend in the private-sector corporate book. The increase in corporate NPLs is largely driven by a few borrowers, which highlights the banks’ vulnerability to event risk stemming from large concentrations and the ongoing build-up of credit risk given recent aggressive credit expansion. Moody’s does not anticipate any change in this structural vulnerability over the timing horizon of its outlook.

The Peninsula