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In search of sustainable growth

Doha Bank, one of Qatar's leading lenders, is cautious about growing its assets despite the country's economic and infrastructure surge, says R. Seetharaman, the bank's CEO

R. Seetharaman
Image Credit: Supplied
R. Seetharaman
Gulf News Quarterly Financial Review

With the global economic outlook becoming gloomier, Qatar and its banks are not completely insulated. Yet the banking environment has been well protected by the Qatari authorities, and features only modest levels of non-performing loans. Keeping risk management and asset diversification under close control appear critical to strategic strength.

Doha Bank has reported 13 per cent profit growth for the nine-month period. Considering Qatar's GDP growth rate of 18 per cent, are you content with that performance? Loan growth so far this year has been modest, at about 9 per cent. Will that change?

We are keeping pace with the underlying growth in the Qatar economy, but with an eye on effective risk management. About 25 per cent of the economic growth in the country comes from real estate, but our asset expansion in this sector is very measured (about 1 per cent as against 25 per cent market growth this year).

Conceptually, given the fragile global backdrop, we need to articulate a sustainable form of growth. In the past too our focus has been sustainability. Whether [in] boom or downturn, for the past eight years our performance graph has always been ascending. You can do this in a highly volatile economic environment only if you are able to manage effectively the global counterparty risks.

Although headquartered in Qatar, with the globalized nature of our operations that counterparty risk is always there. During the crisis our risk exposures were moderate.

In Qatar there has been huge expansion in the project financing space, but our approach to asset expansion has been pretty diversified. In corporate banking we have about 15 per cent market share; in retail it's about 18 per cent; in global operations we have kept exposures mostly to trade finance.

We are aiming for balanced growth in all segments. A significant portion of our asset expansion in recent years has been within Qatar.

We will continue to expand our assets in the region. Wherever we see good cash flow, good profitability, we have not hesitated to take exposure.

In corporate and commercial banking we have grown. The retail sector has grown by 15 per cent whereas our assets [there] have grown by 12 per cent. In the project space we haven't ventured at all, except for modest exposure to a few Qatar-based companies. There is scope for more than 15 per cent growth in this segment, but we are deliberately keeping the expansion at a slower pace with an eye on our overall risk exposure.

You have recently launched the SME (small and medium enterprises) lending programme in the UAE. What is your thinking on that, considering that they in general have limited collateral to offer, and the market may have limited space?

There is huge scope for the SME segment, and we are likely to see huge expansion across the Gulf states. [Already] in Saudi 33 per cent of GDP comes from SMEs, while it is more than 15 per cent in Qatar. The UAE also plays a big role, with so many free zones.

Qatar has set up an exclusive agency to promote SMEs, called Enterprise Qatar.

Given the socio-economic compulsions upon the governments, in terms of employment generation and income distribution, there is going to be increased focus on SME business.

Over the last four years we have seen strong growth in this segment, and Doha Bank has the largest market share here. We have been active in every aspect, ranging from providing working capital to bill discounting and overdrafts - as long as these businesses have a sound business model. We also advise and educate them on book-keeping and basic financial discipline.

[Associated] NPLs have been only about 0.1 per cent. The name of the game is educating the borrowers; we don't always insist on collateral to lend.

I think there is huge potential for us. As long as you can differentiate your product, you can have a space in the marketplace. We have channels, products and e-commerce. We have a product called Doha Souk with which we enrol merchants to a payment gateway, both buyers and sellers.

We want in Qatar to create and bundle similar products to our SME relationships in the UAE that will keep us ahead in the market.

Are you expanding your asset size and physical presence in the UAE generally? What other regional markets are you seriously pursuing?

In the UAE we have a book size of about Dh3.5 billion, with funded lending at Dh1 billion and the non-funded portion at about Dh2.5 billion. We will soon be opening another branch in Abu Dhabi which, along with our move into SME segment, is expected to give a big boost to our book size in the UAE.

We are also expanding our operations in Kuwait and Saudi Arabia. In Kuwait we have had branch operations for the past three years; in Saudi we have applied for a licence.

Do you have plans to raise funds from the international market?

The bank is adequately liquid and has no immediate need of that sort. However, we have plans to raise funds through a senior debt issue next year to iron out medium-term asset-liability mismatches, and plan to hold investor meetings by [this] year-end to gauge market conditions.

But pricing will be a key factor in deciding the timing. Customer deposits are cheap, [so] we are waiting for the right window.

Have NPLs peaked in Qatar? What is your outlook now?

In Qatar the overall size of NPLs is about 1.8 per cent of total assets. We expect that to come down substantially this year, to about 1.5 per cent, as the government has increased the salaries of Qatari nationals by 60 per cent.

Doha Bank has an NPL ratio of 1.9 per cent, which is fully provided for. We are targeting to bring it down to 1 per cent next year. We saw most of the NPLs coming from the retail space. Because of the surge in per capita incomes, banks were liberal in retail loan products such as personal loans, mortgages, car loans, etc; together the ratio went up to 6 to 7 per cent there.

The Central Bank and Qatar Investment Authority played crucial roles in stabilising the banking sector through their acquisition of share stakes. Do you expect these will be eventually sold?

My understanding is that these are long-term investments. The Qatar business model is quite unique. The government announced 20 per cent stake acquisitions when the crisis impacted the banks. They rescued the banks when the market values of their stocks plunged more than 40 per cent, and bought out all the local listed shares in the banks' portfolios with the condition that their proprietary portfolios should not exceed more than 150 million riyals. In the real estate portfolios too a stress test was done and all the distressed assets were bought over.

These [moves] virtually de-risked the bank balance sheets. That was very useful. Most banks are now profitable.

The central bank decision to cancel the Islamic banking licences of conventional institutions has impacted a number of banks, including Doha Bank. What have you done with that component of assets and liabilities?

The de-licensing of our Islamic business, about 11 per cent of total, has had a short-term impact on our operations. So far we have managed to convert more than 95 per cent of our assets from Islamic to conventional; the balance sheet realignment should be complete by the end of this year.

The writer is Deputy Business Editor, Gulf News