Commercial banks in Qatar “will continue to benefit” from robust demand for credit over the coming years, BMI Research has said in a new report.
“In particular, public sector credit demand will remain strong, as the government looks to finance large-scale investments into infrastructure projects linked to the 2022 FIFA World Cup and the National Vision 2030 diversification programme,” the Fitch Group company said.
Illustrating this trend, it said net claims on the public sector increased by 43.8% over the course of 2016. Moreover, global hydrocarbon prices are set to rise – BMI’s analysts forecast Brent crude to average $57 for a barrel and $60 over 2017 and 2018, respectively, compared with an average of $45.1 in 2016 – boosting consumer and business confidence in Qatar, and in turn “fuelling” private credit demand.
Overall, BMI forecasts Qatar’s annual asset growth at 12% and 12.5% in 2017 and 2018, respectively; the highest level in the GCC.
The credit quality of Qatari bank assets “remains strong” at present, with non-performing loans (NPLs) equal to only 1.2% of total loans, BMI said citing an IMF report earlier this year.
According to BMI, loan growth will remain robust in Qatar over the coming years, as government investment into infrastructure fuels credit demand. Deposits will expand at a slower pace, as state and oil & gas sector earnings remain constrained by lower energy prices.
Commercial banks’ increasing exposure to the public sector will continue to weigh on profitability. Loan growth will remain strong in Qatar over the coming years – averaging a forecast 15% annually in the 2017-2021 period – as large-scale government investments into infrastructure and diversification programmes fuel domestic demand for credit.
Deposits will expand at a slower pace as lower global energy prices (relative to levels recorded before the H2, 2014 slump) continue to impact state earnings and hydrocarbon sector profitability.
BMI forecasts Qatar’s loan-to-deposit ratio to rise from 115.5% in 2016 to 124.4% in 2018. Local banks will rely on external sources to fund the shortfalls, and while the sector remains stable, asset quality is set to gradually decline.
The government’s decision on March 16 to reduce its reserve requirement from 4.75% to 4.5% will provide some welcome breathing space for local lenders, though their increasing exposure to the public sector – where interest rates are substantially lower than in the private sector – will weigh on profitability, in turn strengthening the case for future sector consolidation and overseas expansion.
Deposit growth has slowed in recent years as lower energy prices have impacted state and hydrocarbon sector earnings, and will continue to be outpaced by asset growth – averaging 10.2% over 2017-2018.
Qatari banks, BMI said will as such remain reliant on external sources – mainly within the rest of the GCC and Europe – to fund shortfalls. These circumstances will raise pressure on asset quality in the country, and it expects non-performing loans (NPLs) as a share of total loans to increase gradually from the 1.2% level recorded by the IMF in January 2017.
The NPL ratio will nevertheless remain the lowest compared regionally, and overall sector stability will persist as domestic banks have continued success in raising money from abroad.
BMI notes that the establishment of the Qatar Central Bank’s “100% loan-to-deposit ratio target for this year is likely to be postponed for several years”, as a strict implementation at this point would result in a credit squeeze, significantly increasing costs of borrowing.
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