Qatar's years of double-digit gross domestic product (GDP)
growth may be over but the story behind the country's
current, if slower, economic performance is no less
impressive. While a self-imposed moratorium on gas
developments in the giant North Field looks set to
continue until at least 2015, the government has acted
swiftly to stimulate the Gulf country's nascent
non-hydrocarbon private sector to achieve sustainable
growth.
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In 2011, real GDP growth reached 13%, reflecting the trend
over much of the previous decade, before falling to 6.2%
in 2012. This downward shift signalled the end of major
development programmes in the oil and gas sector, as well
as the impact of the moratorium, hitting the country's
overall economic performance. Yet, this exercise in
hydrocarbons self-discipline appears to have drastically
improved Qatar's longer term growth prospects. By 2015,
the oil and gas sector is expected to constitute about 46%
of total GDP, compared with about 60% at the start of the
decade.
These changes point to the success of government policy in
transitioning Qatar to a diversified economy. Yet, they
also speak of an environment in which the country's banks
have had to adapt, to some degree, to this new business
landscape. "Qatar's economy has entered a transition
phase," says Charles Carson, CEO of Standard Chartered in
Qatar. "But we expect accelerated growth to resume by
2015, as the infrastructure developments relating to the
2022 FIFA World Cup pick-up."
Over the next five years, the government has allocated
about $182bn towards infrastructure spending. This sum
will help to finance the construction of critical
infrastructure, including upgrading the capacity for road,
rail, air and maritime transport. Additionally, new
housing, sewage and water infrastructure, as well as the
associated construction of stadia for the 2022 World Cup,
will benefit from this spending.
Piece of the pie
Qatar's banks have not failed to capitalise on this surge
in infrastructure development. Non-hydrocarbon growth rose
to 11.3% in 2013, creating a host of new opportunities for
the country's lenders. Figures from the central bank
indicate that the banking system's total assets grew by
11.4% in 2013, while deposit growth reached 19.7%.
Moreover, the vitality of the system was underscored by
the low ratio of non-performing loans (NPL), at 1.7%, set
against an average return on equity of 16% for the
year.
Despite the strength of these numbers, increasing
competition in the domestic market remains a challenge,
even for the largest players. Of Qatar's 18 licensed banks
operating outside of the Qatar Financial Centre, seven of
these are either subsidiaries or branches of foreign
lenders, while the top five largest local lenders dominate
with about 84% of the system's total assets. As such,
carving out a strategy to capitalise on growth sectors of
the economy has seen varying responses from the local
operators.
"The Qatari economy and its banking system, as well as the
Gulf Co-operation Council [GCC] region economies, are
anticipated to grow strongly over the medium term. Qatar's
trade volumes are also increasing every year," says
Abdulla Saleh Al Raisi, CEO of the Commercial Bank of
Qatar (CBQ). "As the second largest bank in Qatar, with a
regional presence in north Africa and the Middle East, we
are very well positioned to benefit from this growth. We
want to build a profitable market share in private and
personal banking, where we believe that we have a very
competitive proposition, and improve the profitability of
our wholesale banking franchise, including growing our
share of low-risk and profitable government sector
business."
In this space, predominantly characterised by a
competitive retail market on the one hand, and large
project finance contracts on the other, finding a niche
can be challenging. Smaller market players have adapted by
targeting local contractors in the corporate banking
sphere.
"Project infrastructure contract sizes are increasing all
the time and at times we can't match the scale of the
financing required. Our preference is to work with local
contractors as we understand the domestic market very
well. In this respect, the bank has identified
medium-sized enterprises as a key growth area. It's
something we're looking to develop over the longer term,
as we think this sector of the economy is relatively
underbanked," says Salah Murad, chief executive of Ahli
Bank.
Risky Business
While the banks' growth strategies, and the sector
fundamentals that underpin them, remain robust, some
hazards do persist. As much of the country's recent
economic growth has stemmed from the construction and real
estate sectors, the associated elevation of the banks'
risk exposure to these sectors has grown. According to a
Standard & Poor's research note published May 7, 2014,
Qatari banks' exposure to real estate and construction
stood at 20% and 6% of total system loans by year-end
2013, respectively. Typical project delays associated with
infrastructure projects, including cash-flow lag, have
also proved disruptive to profitability.
"This sector has been an important driver of the
problematic exposures for certain banks and a
deterioration of the overall conditions in this sector
could generate higher credit losses for some banks in the
domestic market," says Timucin Engin, an analyst with
Standard & Poor's Dubai office.
Yet, this risk is partly offset by the fact that the
banking sector as a whole remains very well capitalised,
with a high level of provisioning, particularly among the
largest operators in the market. The country's largest
lender, Qatar National Bank (QNB), which represents about
45% of total banking sector assets, has a capital adequacy
ratio of 16.3%, against a sector average of 16%. Moreover,
NPL ratios remain at less than 2% in the sector.
"CBQ has one of the biggest shares of private sector
lending and our balance sheet is to an extent a mirror of
the private sector of Qatar. In common with other banks
that operate in the private sector, we have seen some
improvement in the operating environment in the past
couple of quarters. Our overall asset quality remains
good, despite the higher provisions taken in 2013 on a few
large domestic exposures," says Mr Al Raisi. "Looking at
regional and global comparatives, CBQ's NPL ratios are not
high and have improved in the first quarter of this year,
and with expected growth in our loan book, these levels
should moderate further."
Questionable Intentions
An additional uncertainty relates to the oversight of the
banking sector. The long-term implications of changes to
the financial regulatory environment, including
streamlining the various regulatory authorities under the
auspices of the central bank, remain unclear. While
nominally imposed to improve the country's regulatory
landscape, by increasing transparency and efficiency,
doubts have been raised as to whether such centralisation
of powers will ultimately benefit the broader financial
services industry.
This change followed a unilateral decree issued by the
central bank in 2011, in which conventional banks were
forced to close their Islamic banking windows by the end
of the year, leading critics to question the haste of the
decision, as well as the intentions of the central
bank.
In June 2013, the central bank introduced new legislation
covering the investment options of local banks. Under the
new laws, which curb banks' investment options, securities
portfolios are limited to 25% of a bank's reserves.
However, government and national bank debt remains the
exception to this rule, meaning that the banks are
indirectly encouraged to transfer excess liquidity into
government holdings. In addition, limitations are imposed
on securities held outside of the country, with a cap set
at 15%. Furthermore, restrictions covering the allocation
of a bank's capital in unlisted securities both inside and
outside of the country, set at 10% and 5% respectively,
were introduced. This move by the QCB was widely regarded
as a decisive move to strengthen the domestic financial
framework.
Moreover, the prospect of ever larger infrastructure
financing requirements, that dwarf the capacity of the
country's largest lenders, is starting to change lending
strategies in the market. Increasingly, Qatar's banks are
looking to syndicated loan activity to solve this
problem.
"Syndicated loan markets are seeing a revival in the
region, and will be the primary source of cheaper
wholesale funding for larger private sector companies,"
says Mr Al Raisi. "Most recently, we closed a $1bn
dual-tranche, syndicated-term loan with a subscription of
$1.28bn, compared with a launch size of just $600m. CBQ
was also the first Qatari bank to issue senior bonds under
a euro medium-term notes programme, as well as the first
to issue and list global depository receipts on the London
Stock Exchange."
Stream of Sukuk
In this environment, the country's Islamic lenders have
also prospered, despite facing commensurate challenges. A
large lead over conventional rivals in terms of assets saw
total asset growth of 35% in 2011 and 20% in 2012, fall
sharply in 2013 to just 12.2%. Broadly, this trend was in
line with conventional counterparts, though Islamic
banking growth is expected to remain higher on average
over the next few years, according to S&P's Mr Engin.
Qatar's Islamic finance sector has also been noted for its
innovative approach to the development of sharia-compliant
products and services.
"We are extremely proud of QInvest's performance in 2013.
We were able to reduce costs by about 30% and increase
revenue by 40%, while also reducing balance- sheet risk,"
says Tamim Hamad Al-Kawari, chief executive officer of
QInvest, one of Qatar's leading financial services
firms.
QInvest recently launched its sharia-compliant 'shiraa
funds', in partnership with Qatar Islamic Bank, which
target equity and sukuk options across three distinct risk
categories. The company is also responsible for the
development of the QInvest Managed Account Platform, which
is the world's first fully sharia- compliant account
platform.
In line with this growth, sukuk issuance emerging from
Qatar is expected to accelerate over the medium term. In
January 2014, the Qatar Central Bank issued $6.6bn of
conventional and Islamic bonds, of which roughly half were
sukuk. "Infrastructure growth by itself is unlikely to
spur a greater volume of sukuk issuance from Qatar as the
government surplus will cover a large part of this
expenditure. What will drive it forward is the country's
natural economic growth in general, particularly at the
government related entity and corporate level," says
Hani Ibrahim, head of debt capital markets at QInvest.
Moreover, Qatar's Islamic institutions have also been
highly active on the global stage. Qatar Islamic Bank, the
country's largest sharia-compliant lender, announced in
March 2014 it had entered into exclusive discussions to
acquire a stake in Turkey's Bank Asya.
Other institutions are also looking to Turkey for growth.
"In terms of investment banking, Turkey has been a
particular highlight for QInvest," says Mr Al-Kawari. "We
have grown substantially with respect to our business with
Turkish corporates as well as our joint lead manager and
bookrunner roles on the $1.25bn sukuk issuance for Turkey.
We're looking for more opportunities for QInvest there,
and feel this will be an important market for our
long-term growth."
Extended reach
The increasing globalism of Qatari banks has been a
defining feature of the country's financial landscape over
the past 12 months, made notable by a number of major
acquisitions by the leading lenders. This is partly the
result of the increasingly competitive domestic market and
the natural evolution of larger players seeking higher
growth opportunities abroad. Yet it also reflects the
growing strength and confidence of a banking sector that
is both well capitalised and flushed with liquidity. The
country's two largest lenders by total assets, QNB and the
CBQ, have been especially active in this respect.
"CBQ's international expansion and acquisition strategy to
date has been very successful," says Mr Al Raisi. "We
acquired a 34.9% stake in the National Bank of Oman in
2005, and a 40% stake in United Arab Bank in 2007. Both
these banks have successfully grown their business
franchises and profitability in recent years. The
acquisition of a 74.24% stake in Alternatifbank [in
Turkey] is more recent. In total, these institutions
contributed just less than 27% of CBQ's consolidated net
profit for the first quarter of 2014. The Alternatifbank
acquisition added total assets of QR18.4bn [$5.05bn] and
total lending of QR12.1bn to CBQ's balance sheet in the
first quarter of 2014."
Meanwhile, QNB acquired a 97% stake in Egyptian lender
NSGB in 2013, coupled with other strategic acquisitions,
pushing its global presence to 26 countries.
Promising Future
Qatar's broader economic outlook appears to be strong. The
banking sector continues to play a significant role in its
development, and its continued buoyancy will be a crucial
component of the government's plans to push the country
beyond hydrocarbons. Yet, as Qatar advances its national
vision for 2030, it must also capitalise on its position
as a stable and somewhat neutral player on the global
stage. Despite recent political difficulties encountered
with its GCC counterparts, Qatar's open stance to global
trade and investment lends itself well to the rapidly
shifting global commercial and political landscape.
"In terms of the macroeconomic outlook, I don't see a lot
of downside risks over the long term. If anything, I see
Qatar's position strengthening in light of Russia's recent
actions in Ukraine, and Europe's renewed effort to secure
a more reliable supplier of gas," says Mr Carlson at
Standard Chartered.
For Qatar, the long-term opportunities are abundant. The
challenge will lie in maintaining steady growth; by
avoiding the risks of overheating and upholding the
country's investor-friendly regulatory structures.