Doha Bank in Doha, Qatar. In Asia, the bank is hoping to scale up its operations and expects to grow in India, but such plans have yet to be finalised. Image Credit: Doha Bank

Dubai: 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. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Qatar over the next 12-18 months.

“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.”

Moody's expects Qatar's GDP growth to slow to 2.4 per cent in 2017 from exceptionally high rates of around 13.3 per cent, recorded during the 2006-2014 period. As a result, domestic credit growth will also slow to 5 per cent to 7 per cent range for 2017 and 2018, down from 15 per cent in 2015.

Loan performance is expected to dip from this year. The gradual economic slowdown and continued challenges in the construction and contracting sector will 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) including 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 Arab quartet boycotted Qatar for terror funding. 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.

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