By Santhosh V Perumal

Business Reporter

Banking industry in Qatar will be one of the “hardest hit” by the stringent Basel III capital norms, which is expected to put brakes on the Middle Eastern lenders’ growth.

“Fast-growing players in Qatar, Kuwait, and the Levant will be the hardest hit, as any growth in assets requires accompanying growth in Tier 1 capital to meet new standards,” Strategy& said in a report.

By contrast, countries that have witnessed relatively slower growth in recent years — including Bahrain, Saudi Arabia, and the UAE — will have little difficulty meeting or even exceeding required capital adequacy ratio if they continue along that trajectory, it said.

However, the new capital requirements will hinder their growth if they want to ramp up regional and international expansion. Therefore, they too would need to rethink their business and asset mix with an eye to strategic capital requirements, the report added.

Banks with the greatest potential capital shortfalls as a result of not thoughtfully addressing Basel III requirements could see corresponding declines in return on average equity (ROE). Even the most aggressive growth scenarios estimate substantial drops in ROE.

Although the magnitude of Basel III’s impact will vary by country, the new rules will put the brakes on Middle East banks’ rapid expansion, it said, adding the analysis shows that the Middle East banking sector will experience an average capital shortfall of around 25% of total regulatory capital required by 2019, assuming current growth rates.

Even with more aggressive growth generating more internal capital, the shortfall would reach no less than 18% of total regulatory capital required as per Basel III. In nominal value, the Basel III capital shortfall was estimated at just over $35bn in 2019, equal to roughly 25%-28% of the total required to ensure no shortfalls across any of the 22 banks Strategy& studied in the region.

The implementation of Basel III regulations will have a substantial and lasting impact on the banking sector’s capital and liquidity positions, as well as its profitability, the report said, adding that putting the new standards in place will also involve a significant measure of implementation complexity from a technology and processes perspective.

 

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