Driven by an increase in lending portfolios due to a gradual acceleration of infrastructure projects, the collective asset base of listed banks in Qatar has gone up 11% or by QR110bn year-on-year as of December 2015, according to KPMG in Qatar.
The lending portfolios have increased by QR105.6bn (16.3%) in 2015, although at a lower level than in previous years, points out Omar Mahmood, partner at KPMG in Qatar and the global firm’s head (Financial Services for the Middle East and South Asia Region).
“This is predominantly due to a gradual acceleration of infrastructure projects as we get closer to 2022, with growth predominantly from the Qatar market and specifically in the corporate sector. Government and government-related entities still account for a significant portion of the assets of listed banks at around 32%, slightly down from the 35% last year,” Mahmood told Gulf Times yesterday. While deposits grew at 11.2% (up by QR74.7bn) from December 31, 2014, the ‘due to banks’ balances had a growth of 28.3% (up by QR22. 9bn) as banks look to diversify their funding base.
The government and government-related contribution to the deposit base of listed banks actually declined by 4% from the prior year, as a result of the economic conditions impacting Qatar and the wider region, which also contributed to the tightening liquidity in the local market, Mahmood said.He said the listed banks in Qatar have delivered a “modest set” of results for the year that ended in December 2015 when compared to the prior year due to “challenging” market conditions.
A recent report by KPMG in Qatar revealed that combined net profitability of listed banks increased by 4% from the year ended in December 2014, as compared to the 13% and 8% growth rates for the prior two years.
“It’s undoubtable that the decline in oil prices has had a significant impact across most sectors in Qatar and banks have of course been affected. However, as well as oil prices, there are a number of other issues impacting the industry including geo-political uncertainty; government cost-reduction measures; and increasing competition, all of which have contributed to one of the lowest overall profit growth rates in recent years for listed banks in Qatar,” Mahmood pointed out.
Specific reasons that impacted the industry include margin compression, increased investment impairment, tightening liquidity and reduced loan impairment.  He said the costs of funds have come under pressure as banks have been forced to look at market and bank funding given the fact that the lower cost government deposits are harder to come by as a result of the lower oil prices. Government and related deposits have decreased year on year. Further, financing income as has also come under pressure as asset growth has been limited, competition has increased and rates have remained low.
Market sentiment has been reflected in equity prices as the local and regional stock markets have seen a downward trend. As a result banks have recorded impairment charges on their equity portfolios. The impact has, however, been limited given the QCB’s tight regulations around listed equity investing post the global financial crisis.
Symptomatic of the wider economic concerns in the region and declining oil prices, liquidity has come under significant strain in 2015, which continues to be a constraint for business growth across the banking sector.
Impairment charges on loans and advances have actually decreased by 21% year on year, which has been a saving grace for banks and has been a significant contributor to the overall 4% increase in profitability. This reflects the increasing conservatism in bank lending supported by the robust regulatory measures taken by the QCB in recent years.
“Without this reduced impairment charge, the overall profits of listed banks in Qatar would have declined year on year,” Mahmood said.
Market sentiment also appears to be correlated with the fundamentals, with the share prices for all but one listed bank exhibiting a downward trend in line with the overall stock market, he said.
It is also of note that the share price of the five conventional listed banks has on average declined by a far higher percentage (20.6% decline) when compared to their three Islamic counterparts (8.6% decline) – a possible reflection of the greater market optimism in the Islamic Banking sector, Mahmood added.

IFRS 9 ‘game changer’ for lenders

One of the most significant factors in relation to impairment is the upcoming International Financial Reporting Standard IFRS 9, which will be a “game changer” not only in Qatar but also globally, said Omar Mahmood, partner at KPMG in Qatar.
This, he said, becomes effective on January 1, 2018, with 2017 being a transition year. Hence, most banks are already getting ready for this in 2016.
“It is expected that IFRS 9 will result in a significant increase in provisions for banks in Qatar and globally and boards are already gearing up for this impact. The main reason is that provisioning under IFRS 9 will be based on an ‘expected loss’ model and will move away from the current ‘incurred loss’ model which many commentators blamed for delaying losses at the time of the 2008 financial crisis,” Mahmood said.
He said the QCB was looking into the implementation of this standard and “this is where we can see an adverse impact on bank profitability in the coming few years as banks look to build up their provisions in advance of 2018.”

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