Challenging times for Qatar banks, but outlook positive, says KPMG
February 07 2016 10:08 PM
banks
Mahmood: Most banks feel worst is over in relation to NPLs.

By Pratap John/Chief Business Reporter

With the strong measures taken by the Qatar Central Bank (QCB) in recent years through stricter regulations, adoption of Basel III rules and closer monitoring of key trends and ratios, Qatar’s banking sector is strong enough to weather the current economic turbulence, says Omar Mahmood, partner at KPMG in Qatar.
Banks do not have significant equity investment portfolios so will not be heavily impacted by stock market volatility, nor do they have exposure to complex credit instruments, which holds them in a good position, Mahmood said in an interview with Gulf Times in Doha.
Further, with the upcoming Qatar 2022 World Cup and planned infrastructure projects, banks are likely to be able to continue to grow in the foreseeable future, said Mahmood, also the global firm’s head (Financial Services – Middle East and South Asia).
Asked whether the local banks should avoid exposure to some sectors such as real estate, which may see a correction, Mahmood said, “It would be impossible to avoid such a sector completely as it is a significant part of the economy, but banks can certainly manage this risk by being diligent in their credit writing process and being more cautious.”
He emphasised that the QCB already controls exposure to certain sectors (i.e., real estate) through its regulations, which has helped.
The SME (small and medium enterprises) sector is a higher risk segment and banks are already being cautious around a significant increase in exposure to the sector, and the contracting industry remains a concern with delayed payments impacting the ability of banks to continue to lend, Mahmood said.
On the growing concerns among local banks in relation to non-performing loans (NPLs), Mahmood said, “We have actually seen a reduction in credit impairment charges in 2015; given that many banks increased their provisions in 2014, so most banks probably feel that the worst is over in relation to NPLs.”
Banks in Qatar have been relatively cautious in terms of their SME lending as they are factored in the riskiness of this sector, which is high risk and high return.
“Since the Qatar Development Bank has a large share of the SME market with government support, it is unlikely that we will see what we have seen in Dubai here in Qatar. The scale of expats in Qatar having their own businesses is also much lower than in Dubai where the effect is amplified.
“In addition, the QCB has kept a tight control on the banking sector in Qatar and particularly in the lending side of the business. They capped rates on the retail business a few years ago and they have very stringent provisioning guidelines to ensure that losses are reported when incurred,” Mahmood said.
He said the asset–liability mismatch is a regional banking issue as many banks in the region relied on larger/lumpier government (and related) deposits, which are more shorter in nature, whereas the asset side of the business is concentrated on loans, which are longer term in nature.
“There are two main ways in which this can be tackled,” Mahmood pointed out, but said clearly the issue will not be resolved completely as this is the banking model in the region: The asset base can be moved to a shorter-term maturity and/or the liabilities can be moved to longer-term maturities.
Given that loans are the key component of assets for banks in the region, which are longer term in nature, it is unlikely that banks will move away from this into more short-term investments other than to address the liquidity issue above on a smaller scale, he said.
The liability side of the banks’ balance sheets is an area of focus for banks to both address this asset-liability mismatch and ensure continue compliance with certain Basel III provisions as stipulated by the QCB (i.e. net stable funding ratio).
“Banks are already looking at longer-term funding to address these concerns through drawdowns on EMTN programmes and sukuk issuances, and a greater push to raise longer term non-government related deposits,” Mahmood said. Page 20



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