News Column

Moody's maintains stable outlook on Qatar's banking system

June 1, 2014

The outlook for Qatar's banking system remains stable, unchanged since 2010, says Moody's Investors Service in a new report. The outlook reflects Moody's expectation that Qatar's strong economic environment will continue to sustain banks' robust financial metrics - primarily strong earnings, sound capital buffers and low levels of non-performing loans (NPLs).

However, the rating agency says that these strengths will remain moderated by risks associated with Qatar's reliance on the hydrocarbon sector, the banks' relatively high dependence on short-term foreign funding and the country's still-developing corporate-governance and risk-management culture.

Moody's forecasts real GDP growth of six per cent in 2014 driven by elevated public spending. The strong public spending will translate into growth of 11 per cent in the non-hydrocarbon sector, offsetting flat liquefied natural gas output and leading to domestic credit growth of 15-20 per cent. Although Moody's notes that the downside risk of adverse changes in hydrocarbon prices could dampen economic confidence and banking sector performance, the rating agency recognises that the government has ample resources to moderate the impact over the 12-18 month outlook period.

Moody's expects the banking system's NPLs to remain at around 1.5-2 per cent of gross loans over the next 12-18 months, owing to the strong operating environment, evolving prudential regulation and the sizeable proportion of government-related loans (accounting for 42 per cent of the total loan book).

However, Moody's recognises that banks' asset quality will remain exposed to event risk over the outlook period because of (1) high borrower concentrations and limited transparency surrounding local conglomerates; (2) the challenge of upholding prudent underwriting and risk management processes and procedures amidst rapid credit expansion; and (3) moral hazard created by past government interventions.

Despite continued balance sheet growth both domestically and abroad, Moody's also expects the banks to maintain healthy capital levels with system's Tier 1 capital ratio in the 14-16 per cent range over the outlook horizon. Moody's notes that Qatari banks capitalisation metrics are sufficient to absorb losses under the rating agency's low probability "adverse" scenario.

Moody's expects that Qatari banks will maintain sound liquidity buffers (liquid assets in the range of 25-30 per cent of total assets) and a high level of stable yet concentrated government-related deposits (42 per cent of total deposits) over the outlook horizon. While Moody's notes that Qatari banks' dependence on short-term borrowing from foreign banks is declining, it still remains relatively high, exposing the banks to refinancing risks and shifts in investor sentiments abroad.

Despite margin compression, Moody's expects bottom-line profitability metrics to remain broadly stable, supported by higher lending volumes, a low cost base and low provisioning requirements. In addition, Moody's expects system's cost-to-income ratio to remain in the historical range of 25-30 per cent, the lowest amongst the Gulf Cooperation Council countries.

The stable outlook on Qatari banking system also takes into account Moody's view that the Qatari authorities' will remain willing and able to provide support to the banks in case of need, as evidenced by both the government's previous interventions and its strong financial position.

Moody's rates three conventional and two Islamic banks in Qatar, which together accounted for around 72 per cent of the country's banking system assets as of December 2013.

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Source: CPI Financial

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