Dubai

Qatar’s banking system is facing further deterioration in outlook as the economic and diplomatic sanctions by its neighbours entered third month this week.

Credit rating agency Moody’s Investors Service has changed the outlook on Qatar’s banking system to negative from stable due to the weakening operating conditions and continued funding pressures facing Qatari banks.

The rating agency’s new outlook for the banking sector also captures the potential weakening capacity of the Qatar government to support the country’s banks. “Qatari banks’ reliance on confidence-sensitive external funding has increased in recent years due to a significant decline in oil-related revenues,” said Nitish Bhojnagarwala, a vice-president at Moody’s. “This leaves them vulnerable to shifts in investor sentiment.”

Factors such as a general decline in the operating environment, loss of business confidence of the non-oil private sector and external exposure of Qatari banks, particularly to the GCC (Gulf Cooperation Council) and Mena (Middle East & North Africa) based customers could result in a spike in non-performing assets (NPAs) if the current crisis remains unresolved over a few months or more.

Moody’s expects Qatar’s GDP growth to slow to 2.4 per cent in 2017 from exceptionally high rates of around 3.3 per cent recorded during the 2006-2014 period. As a result, domestic credit growth will also slow to the 5 per cent to 7 per cent range for 2017 and 2018, down from 15 per cent in 2015.

Loan performance is expected dip from this year with spike in impairments. The gradual economic slowdown and continued challenges in the construction and contracting sector are expected result in put modest pressure on loan performance.

“We expect system-wide problem loans to increase to around 2.2 per cent of gross loans by 2018, up from 1.7 per cent as of December 2016,” said Bhojnagarwala.

The rating agency expects government’s capacity to provide support to the banking system is potentially weakening, as captured by the negative outlook on the Aa3 Qatar government’s bond rating.

Following its decision last month to place sovereign credit rating outlook for Qatar negative, the rating agency has also placed 10 Qatari banks and leading government owned entities (GREs) such Qatar’s national oil and gas company Qatar Petroleum (QP), Industries Qatar and Qatar Electricity and Water Company negative.

Credit rating agency Standard & Poor’s (S&P) was the first to take rating action on Qatar within days after the diplomatic row erupted. The rating agency has lowered its long-term rating on the State of Qatar to AA- from AA and placed the rating on credit watch with negative implications.

Fitch has placed Qatar on negative credit watch. Citing the possibility of a “sustained” political crisis, the rating agency said it was placing Qatar’s investment grade AA status on credit watch.

 

Deposit outflows to increase costs

The gradual economic slowdown, combined with Qatar’s ongoing dispute with neighbouring countries and continued challenges in the construction and contracting sector, will lead asset quality to dip slightly.

Data suggests Qatari banks have significant credit exposures to entities within GCC and around the Mena region. A financial stability report published by the Central Bank of Qatar in 2015 put the GCC asset exposure of the banking system at 26.9 per cent of total assets and 15.9 per cent elsewhere in Mena.

A prolonged regional dispute could trigger some outflows of foreign deposits and other external funding which represents around 36 per cent of total banking system liabilities as of May 2017. As a result, the banks’ liquidity buffers (at 24 per cent as of total assets as of December 2016) would likely reduce, as domestic deposits remain tight due to reduced oil revenues.

Profitability will come under pressure from slowing credit growth and narrowing margins. Margins will be hit by rising deposit costs as liquidity conditions remain tight. Analysts expect Qatari banks’ interest-rate margins to move below the 2.1 per cent achieved in 2016.

“Against this backdrop, Qatari banks’ profitability will likely decline, with return-on-assets declining to around 1.4 per cent for 2017, from 1.6 per cent in 2016, driven by increases in funding and provisioning costs”, said Bhojnagarwala.