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DOHA: The cap on Qatar’s retail lending and Qatari banks’ increasing reliance on foreign interbank borrowing will significantly impact the growth potential of Qatari banks, according to a latest report.
“The State of Qatar will witness strong lending growth over the next half decade, driven by major government infrastructure projects. Qatari banks are likely though to be stretched in funding this lending growth as a result of their current high level of balance sheet leverage. The cap on retail lending by the Qatar Central Bank, alongside banks’ margins coming under pressure through asset spread contraction, will significantly impact Qatari banks’ profitability”, the report published by SICO Research, a division of Bahrain-based regional investment bank, Securities Investment & Company (SICO) noted.
In addition to the bank’s increasing reliance on foreign inter-banking borrowing and real estate exposure, their aggressive international expansion plans could also dilute the bank’s earnings.
The report notes that the government has actively supported Qatari banks in the past, and is likely to offer further help to ensure adequate funding. Capital or deposit infusion by the state would significantly enhance banks’ lending capacities. However, deposits from the public sector have proved to be unstable over the past few years, limiting local banks’ ability to fund long-term projects. In SICO’s view, Qatari banks are more likely to rely on other long-term liabilities to participate in these projects, although this will also limit their margin spreads, since Government-supported development projects are unlikely to offer particularly attractive yields.
The QCB has capped the retail lending rate at 1.5 percent above the overnight lending rate, which currently stands at 4.5 percent. SICO foresees that this cap will considerably constrain retail banking profitability, particularly in a low-interest rate environment. A lending rate cap, SICO rationalises, prevents banks from spreading their risk by charging differential rates to customers of different creditworthiness. Qatari banks will likely charge higher retail fees, or alternately focus on high creditworthy clients. The potential measures will lower delinquencies, and hence lower future provisioning requirements, supporting profitability. Despite a low-interest rate environment, the report notes that national banks will continue their retail business, since it offers operational diversification. In addition, despite the QR2m lending cap for nationals imposed by the QCB, banks are expected to benefit from higher disposable incomes in Qatar. Incomes arose from salary increases granted to public sector employees in the third quarter of 2011, and subsequently followed by the private sector. Higher disposable incomes and lower interest rates are likely to reduce domestic borrowers’ debt loads, while increasing bank deposits, and providing improved cross-selling opportunities.
According to the report, Qatari banks’ margin spreads are expected to come under pressure during the second half of 2012 and through 2013, driven by asset spread contraction. Margins are likely to contract by between 20 and 30 basis points in 2012, due to factors which include a lower demand for higher-yielding local currency loans, and a balance sheet shift towards lower-yielding public sector lending. At a systemic level, the report notes, a move by national banks to increase their lending towards the public sector will negatively impact their asset yields. Coupled with a decline in public sector deposits, and funding through more expensive private sector liabilities, should further shrink banks’ net interest margins.
Lending growth in the state grew strongly at 36 percent year-on-year in the first half of 2012, due to the significant number of infrastructure projects currently underway. Qatari banks are witnessing a surge in foreign currency dominated lending. This is leading to a ‘dollarisation’ of the banks’ balance sheets, as they continue to lend in foreign currency, with non-riyal lending soaring by 250 percent over 2010. Foreign currency credit accounted for 51 percent of total lending during the first half of 2012, up from 22 percent in 2010. To avoid large currency-related balance sheets mismatches, banks are funding their non-riyal books through the interbank window from international banks. These borrowings have grown to 129 percent of equity in July 2012, compared with 104 percent in December 2010, making these banks’ funding position, in SICO’s opinion, increasingly vulnerable.
The QCB relaxed real estate lending regulations in the first quarter of 2011, allowing banks to increase their real estate exposure to up to 150 percent of their capital and reserves, compared with 100 percent earlier. This regulatory change, together with the government’s increased infrastructure spending, resulted in real estate lending surging to 32 percent of total lending in 2011 compared with 21 percent in 2010. This spree has made banks’ lending portfolios more vulnerable to any decline in real estate prices. The real estate concentration of Qatari banks is high in comparison with their GCC peers.