The outlook for the Qatari banking system is stable, reflecting not only the banks' solid franchise development in a strong macroeconomic environment and a highly supportive banking system, but also captures the challenges faced by the banks in maintaining good credit quality fundamentals and earnings in this small concentrated market, Moody's Investors Service said in its latest report on the country's banking system outlook over the next 12 to 18 months. “The Qatari banking system has weathered the global financial crisis relatively well thanks to the country's enduring macroeconomic growth and the government's repeated and timely interventions during 2009,” the report said. “For 2010, we expect Qatari banks' pre-provision profitability to remain at good levels and to be supported by higher business volumes and a low cost base. The banks' net profitability, however, is likely to continue to be affected by elevated provisioning expenses,” it said. Qatari banks report satisfactory liquidity. At year-end 2009, the ratio of liquid assets to total assets for the three rated banks was around 32 percent, higher than the ratio of 26 percent reported at the end of 2008, while the ratio of (market funds - liquid assets/total assets) had fallen to -16 percent. Furthermore, there was a reduced availability of suitable loans and investments as well as a lower willingness among banks to disburse their excess liquidity. For 2010-11, Moody's expect Qatari banks' balance sheet to gradually resume the growth reported in the pre-crisis period, supported by Qatar's strong economic growth anticipated in 2010; the accelerated government spending on a number of projects, both in the hydrocarbon sector and the non-oil sectors of the economy, such as transport and education; and the banks' higher capitalization which is to be channeled into growing their business activities. The small Qatari banking system is highly concentrated, with the three rated Qatari banks accounting for around 62 percent of total sector assets as at end December 2009. Despite strong market competition, which has been exacerbated since the entry of foreign multinational banks, Qatari banks continue to enjoy strong universal franchises that underpin their bank financial strength ratings (BFSRs). QNB (rated Aa3/P-1/C-) is by far the largest banking group in the country, followed by Commercial Bank of Qatar (rated A1/P-1/C-) and Doha Bank (rated A2/P-1/D+), both of which also control sizeable market shares. The chart below illustrates the market share of the domestic Qatari banks that fall under the supervision of the Qatar Central Bank (QCB). The foreign-owned banks that are regulated by the Qatar Financial Centre (QFC) are primarily engaged in the large financing deals that typically require higher capital levels and are mostly active in investment banking. While these banks offer sophisticated products and services leveraging the know-how and expertise of their parent banks, they lack local knowledge and, more significantly, the relationships and connections that the local banks enjoy. The retail banking segment, meanwhile, typically requires more labor-intensive operations and continues to be serviced primarily by domestic banks, which have larger distribution networks and wider client bases. Moreover, the growing prosperity of the Qatari population in recent years has created good opportunities for domestic banks in the retail sector. In an effort to respond to the high demand for personal and Islamic banking products, domestic institutions have invested heavily in infrastructure development in order to strengthen their capabilities and customer outreach. All three-rated Qatari banks are expected to continue focusing on retail banking by investing in information technology, extending their distribution channels, and introducing new and specialized retail products. Personal loans currently account for around a fourth of the credit extended in the domestic market. A significant proportion of this is given to high-net-worth individuals, who in turn use the funds for productive purposes that generate economic activity. These loans are typically extended to selected high-net-worth Qataris with a “salary assignment” that mitigates the risks of a default of these loans to some extent. However, Moody's emphasized the need for all rated banks to consolidate the risk monitoring and control of all types of risk under a separate and independent risk management unit, reporting directly to the boards of directors. Evidence of a further enhancement of the banks' risk management functions would help improve the Qatari banks' risk positioning scores. Although liquidity management is satisfactory, the banks' funding structures comprise a high proportion of demand deposits and a sizeable portion of interbank borrowings, which are deployed for financing long-term assets, resulting in negative maturity gaps. Fierce competition for deposits, together with the challenging conditions in wholesale markets, is likely to exert pressure on Qatari banks' funding and liquidity. The rated Qatari banks continue to report high levels of pre-provision profits, strong capital levels and a high loss-absorption capacity, all of which support their current ratings, the report noted. Nevertheless, during 2009, their credit quality fundamentals deteriorated largely due to the elevated credit losses in their consumer lending portfolios and loans extended to the construction and the real estate sector. “We believe that the trend of growing problematic exposures in 2010 will gradually be arrested in line with the stronger macroeconomic conditions domestically and the banks' increased focus on recoveries and on improving their overall risk management systems.” On the efficiency front, Qatari banks will continue to benefit from low-cost operations and to report strong efficiency levels that are supportive of their current rating. Despite the modest slowdown in GDP growth in 2009, the local economy continued to expand at a strong rate.
