Dubai: Asset quality metrics of leading Qatari banks are broadly seen stable despite signs of some stress in the contracting sector.

“Though we have seen some signs of stress, particularly within the contracting sector, underlying non performing loans (NPL) ratios have remained broadly stable, with coverage ratios either stable or increasing,” said a recent Morgan Stanley study.

In the short term the domestic contracting sector, although bolstered by partnerships with large international operators, may require a period of adjustment to the tighter oversight of budget and delivery of public infrastructure projects.

Over the longer term, though, improved management of large public projects should reduce disputes and hence payment delays, which should in turn reduce the overdue loans payments in the segment.

Recent increases in real estate prices are expected to support the value of collateral held against banks’ lending. “We think, nevertheless, there remain stresses within the real estate segment, which saw loan stock nearly double during 2011-12. CBQ has among the highest exposures to the sector, with real estate accounting for nearly 30 per cent of loans, twice the sector average,” the report said.

De-risking

The Central Bank of Qatar is in the process of further de-risking bank balance sheets through macroprudential tools along with capital adequacy and liquidity positions. The central bank’s recent proposal for a new 100 per cent cap on loans/deposits ratio (LDR) suggests additional complementary measures are under consideration in improving Qatar’s financial stability.

The ratio is stricter than the former 90 per cent ‘credit ratio’, whose broader funding definition also included foreign interbank deposits, issued debt and some components of shareholders’ equity. The end of 2014 is the proposed deadline for compliance.

System LDR has fallen below 100 per cent in only six months over the last six years, with October’s 105 per cent reading implying a QAR30 billion system deposit funding gap. If implemented as proposed, the new LDR cap seems likely to increase competition for deposits, which would probably raise funding costs in the near-term as banks. Banks closer to the cap would presumably also need to moderate their loan growth.

Analysts say it is likely that the proposed regulation will be amended following consultation with the banks of at the least; the year-end deadline will be extended, possibly over a substantial period, in order to avoid an unnecessary short-term squeeze on bank liquidity and profitability.

Oil price risk

Even prolonged period of lower oil prices is unlikely to result in material reductions or delays in planned public infrastructure spending and thus the impact on banking sector is expected to be negligible. Morgan Stanley analysts expect that the authorities will continue to work to the de-facto deadline of the 2022 Fifa World Cup and a more conservative fiscal budgeting and improved project management should improve sustainability. Additionally, Qatar’s large public reserves remain a significant, if last-resort, backstop. However the analysts said one important effect may be reduced deposit formation and lower liquidity in the banking sector, which may pressure funding costs.