Qatari banks’ loan books will “remain strongest” this year because a sizeable share of their lending activities is to the government and related entities, Moody’s Investor Service said in a report.
Banking sector profitability is on a firm path toward pre-pandemic levels. Economic growth, margin preservation, solid efficiency and moderate provisioning needs will support net earnings, it said.
The dollar peg keeps interest rate increases tied to the US Fed hiking cycle. Rising rates will largely preserve net interest margins with a delay since US monetary policy tends to pass through to deposits and other liabilities more quickly, while loans and other assets tend to reprice with a lag, often due to competition.
“This is relevant for banking sectors that rely heavily on market funding like Qatar, or in Kuwait where the central bank recently fully passed a rate hike onto deposits while the increase on the lending side was partial,” Moody’s noted.
GCC Islamic banks will benefit from the rising rate cycle because they focus on higher-yielding household lending and have near-zero deposit costs.
Their efficiency will remain stronger than global peers because banks have invested in IT infrastructure as well as cost-saving digital offerings and operate limited branch networks.
Ongoing consolidation aims to achieve cost synergies. Qatari banks’ aggregate cost-to-income ratio is among the lowest globally (22.2% in the first half of 2022) with a small and concentrated population that does not require an extensive branch network.
Provisioning costs will rise slightly after post-Covid dips but will remain contained since loan-loss reserves remain ample.
The report also noted the North Field liquefied natural gas expansion project will create new business opportunities for Qatari banks.
The North Field expansion plan, which is the global industry’s largest ever LNG project includes six LNG trains that will ramp up Qatar’s liquefaction capacity from 77mtpy to 126 mtpy by 2027.
Strong capital provides a “substantial loss-absorbing buffer”, Moody’s said and noted GCC banks’ core capital levels are among the “highest” globally, a key credit strength.
At 15% of risk-weighted assets on average, tangible common equity will continue to shield GCC banks from unexpected losses. These robust levels will remain stable, balancing loan growth with unchanged net profit retention efforts over 2023. Core capital is resilient under our low probability, high-stress scenario analysis.
According to Moody’s the regulatory capital requirements in the GCC far exceed Basel III guidance. This is to capture risks posed by high concentrations of loans in economies that remain dominated by government-related entities and a few large family-owned conglomerates.
Loan-loss provisioning against expected losses fully covers problem loans in Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, providing an extra layer of protection to core capital cushions.
Problem loans do not exceed 16% of shareholders’ equity and loan-loss reserves on average across the region, it said.
Qatari banks’ aggregate cost-to-income ratio is among the lowest globally (22.2% in the first half of 2022) with a small and concentrated population that does not require an extensive branch network.