By Pratap John/Chief Business Reporter

Qatari banking system’s reliance on foreign bank funding has been reduced following the government and semi-government entities recently raising their deposits with the local lenders, S&P has said in a report.
Cross border funding has recently decreased from its previous high levels — net banking external debt represented about 19% of system-wide domestic loans at the end of 2012 and 15% in May 2013.
System-wide funding in Qatar benefits from an adequate domestic core customer deposit base. This deposit base’s share in banks’ liabilities has recently increased, reaching 58% in 2012 and 62% in May 2013.
The ratio of system-wide domestic core customer deposits to domestic loans has improved to 87% at year-end 2012 and 94% in May 2013.
This, S&P said reflects an increase in public sector deposits.
The share of domestic public sector deposits in total deposits rose to a “record” of almost 40% in April and May 2013.
The largest deposits are made by government-related entities (GREs). GRE deposits display short-term contractual maturities but are fairly stable, S&P said.
“Nevertheless, to mitigate the potential future narrowness of their customer deposit base in case of a rapid increase in lending, we expect Qatari banks to continue to diversify their funding profiles by issuing more medium- to long-term debt,” S&P said.
The structural material share of banking sector’s external debt in Qatar is largely explained by cross border financing of the country’s largest bank, QNB, and by the geographic expansion of Qatari banks with branches opening in different countries attracting money from large international corporations doing business in Qatar.
The domestic bond market has not really been tapped in the past. Qatari entities’ main issuances — primarily by the government, GREs, and financial institutions--were completed on international markets.
The government has significantly increased its borrowing in capital markets. In S&P’s view, enlarged government debt has fostered the development of domestic capital markets and built up a domestic sovereign bond yield curve.
“We also expect the QCB’s (Qatar Central Bank) new regulation from June 2013, which limits Qatari banks’ exposure to securities outside Qatar as well as equity, bonds, and Islamic bonds in their investment portfolio-to draw more investments toward domestic securities and especially Qatari government bonds,” S&P said.
The global rating agency sees the government’s role as strong and believes the authorities are likely to provide extraordinary liquidity support to the banking system, if needed.