Qatar: A Stellar Performer In Banking

The Qatari banking sector has been one of the stellar performers in the GCC banking region for some years now, capitalising on the huge investment, financial resources and economic growth in Qatar. Qatari banks are profitable and well capitalised. The sector is the most profitable amongst the GCC markets. However, realising the limitations of
the small domestic market, it continues to seek opportunities and acquisitions regionally and internationally and this trend will continue over the medium term at least.

Qatar’s flagship bank and the biggest bank in the GCC, Qatar National Bank (QNB), continues to lead the way in widening its footprint abroad. However, other banks, such as Commercial Bank of Qatar, which acquired Turkish lender Alternatifbank in 2013, are also growing outside the country. QNB has significant apital and liquidity and a low funding cost base. The bank has also increased its ability to source deposits from outside its home market. QNB’s total deposits from European countries has increased from 0.9 per cent in 2010 to 19.6 per cent in 2012, and the bank has the lowest cost of fund among its Qatari competitors.

The bank has a strong presence across markets with high long-term growth potential such as Libya and Iraq. The recent acquisition of Egypt-based National Societe Generale Bank is also in line with QNB’s strategy to expand outside Qatar. In addition, the bank plans to acquire a majority stake in one of Turkey’s top 10 banks. It recently lost out in acquiring Denizbank but is thought to be looking at other opportunities in the large Turkish market with possible names including Finansbank which is currently owned by National Bank of Greece. Turkey remains a key target for many GCC banks due to attractive valuations and strong growth opportunities. QNB also acquired Tunisian bank Banque Tuniso Qatari in 2013. In 2012 it acquired Commercial Bank International in the UAE and Morocco’s Union Marocaine de Banques.

QNB operates one of the widest international network of branches, associate banks, and subsidiaries amongst GCC bank and is now present in 24 countries. The bank’s international operations have been gradually expanded over the years, both organically and through acquisitions, bringing diversification of risk, sources of funding and income.

Qatari banks have become more active in bank acquisitions over the last few years, a factor of their own strong financial fundamentals as well as European and other international banks’ weak financial profiles. European banks are increasingly exiting from the MENA region due to their focus on strengthening capital positions, thus providing opportunities for Qatari and other GCC banks.

The Qatari banking sector is characterised by strong balance sheets supported by a high capital ratios and liquidity. The average capital adequacy ratio for banks in Qatar was 17 per cent at the end of 2012 and the sector’s non- performing loan ratio was only 1.6 per cent, which is the lowest in the GCC.

Other banks looking at targets included Masraf Al Rayan which has agreed terms to acquire Islamic Bank of Britain. It is also looking to acquire a strategic share in a commercial bank in Libya. The bank has earmarked QAR1 billion for acquisitions over the next two years.

Government sector lending has generated strong growth in the loan portfolios of Qatari Banks over the last four years, as government-led infrastructure spending gained momentum. The loan book of the banking sector expanded at a compounded annual rate of 26 per cent from 2009 to 2012 as lending to the government sector soared during this period.

Loan growth to the private sector has remained subdued, and increased by a relatively low 11 per cent in 2012. The share of public sector lending in Qatar’s domestic loans has increased to over 50 per cent now from 32 per cent in 2009. Financing of large capital investments for Qatar’s infrastructure development has been the key to the surge in overall lending activities.

The Qatar government plans to spend $140 billion on infrastructure to 2016 in preparation of the 2022 soccer World Cup. In addition, within the Government’s plans due to be completed by 2020 are the new railway-metro $44 billion),basic infrastructure including roads and completion of the new Airport, ($28 billion), and a new Port ($11 billion).

Although central government projects for the next five years are expected to be funded through the budget, an additional $160 billion (including $50 billion for Qatar Petroleum) will have to be funded in the market. This is expected to sustain high growth in domestic credit activity, both with private sector companies involved in the execution of government projects as well as within the household sector.

Lending by Qatari Banks will continue to increase significantly over the next few years, with growth of around 20 per cent in 2013. Although customer deposit growth of 26 per cent only matched that of loans, it exceeded growth in total assets (17.5 per cent) by a margin. As a result, overall banking system liquidity improved as banks increased their holdings of liquid assets (bank reserves and investments in securities).

All banks in Qatar will benefit but QNB is expected to be the main beneficiary of the strong growth in government spending as it is the preferred banking partner of the Qatari government. Islamic banks will also grow strongly in Qatar, including Masraf Al Rayan and Qatar Islamic Bank, capitalising on the ban on conventional banks to offer Islamic banking services in the country. Some challenges remain for QIB however, as loan asset quality has deteriorated more recently.

QIB has built an extensive international Islamic banking network by establishing or acquiring stakes in a number of associate banks and finance houses in Malaysia, Lebanon, and London. In the domestic market the focus was to build a sizeable branch network to serve retail customers with Islamic financing and deposit products. On the wholesale side,
QIB had a significant involvement in financing projects most notably in the infrastructure, oil and gas, and property development sectors. The Bank also developed substantial investment banking expertise through QInvest.

QIB’s dedicated real estate division provides advisory and project management services to clients and also oversees the Bank’s own real estate investments. QIB maintains a controlling 49 per cent share in Al Aqar Real Estate Development and Investment Co. in partnership with official State of Qatar entities. QIB also owns a 49 per cent share in Durat Al Doha, a real estate developer specialising in high quality residential properties.

Prospects for Qatari banks remain positive, driven by capacity for strong lending growth domestically. The sector will remain acquisitive and domestic banks will continue to look for opportunities outside of Qatar.