Thursday 30, March 2017 by Nabilah Annuar

Qatari banks overcome liquidity crunch; negative impact on profitability

Fitch Ratings in a report said that Qatari banks have overcome a liquidity crunch with a large negative impact on profitability.

Funding costs continued to rise in Qatar in 2016, putting significant pressure on all banks' operating profitability metrics. The main reasons for the increase were Qatari banks' high reliance on corporate and government-related interest-bearing time deposits and lower liquidity in the system given lower oil prices. Banks made efforts to rein in operating expenses, but the sector average cost/income ratio increased by 3.5 per cent in 2016 due to higher funding costs.

Liquidity and funding pressures have stabilised in the banking sector since 2Q16 and banks have been actively managing their loans/deposits ratios close to the 100 per cent Qatar Central Bank (QCB) recommended level. However, this comes at a high price. Another development to help banks manage this ratio is the large inflow of foreign deposits seeking yield (many of which are from Asia), which now comprise many of the largest depositors. Term corporate customer deposits remain the main source of funding, but market funding is becoming a bigger source. Qatari banks have proven their ability to extend funding maturity through wholesale issuance and longer-term deposits. Liquidity remains adequate to anticipate funding maturities.

Asset quality metrics remained strong in 2016 but there was some pressure in contracting and real estate, and loan impairment charges/loans ratios have been rising. Impaired loans ratios remain lower than other GCC markets and exclude an increasing number of restructured loans in the more challenging operating environment. Loan-loss reserves are adequate as a proportion of impaired loans (at nearly 100 per cent) but low compared with gross loans.

Qatari banks maintain adequate capital ratios for their risk profiles despite strong loan growth. Banks are trying to maintain capital ratios, despite robust growth, typically through issuing additional Tier 1 capital.

Lower margins are expected to remain the new norm. Asset-quality metrics will remain under pressure, particularly from difficulties in the contracting and real estate space. Fitch expects a mild increase in provisioning in anticipation of the implementation of IFRS 9 on 1 January 2018. Loan growth is expected to be high single digit in 2017 due to continued pressure on the operating environment from lower oil prices. However, government spending on strategic projects is expected to remain strong.

Issuance in 2017 is expected to be stronger than in the past two years as banks look to extend their maturity profiles and lock in favourable rates, anticipating further Fed rate rises. Pressure on asset quality and profitability could be detrimental to already shrinking core capital levels.


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