A merger between local banks could be a “positive” development particularly as Qatar is a relatively small market where 18 banks regulated by the Qatar Central Bank compete and also because of the challenging market conditions, says Omar Mahmood, head of financial Services at KPMG (Middle East & South Asia).
“In our view, a merger is certainly needed,” Mahmood said highlighting the “economic realities” and “challenging market conditions”.
However, whether or not this will take place is steered not only by fundamentals, but also by non-financially driven factors, which are very difficult to predict, Mahmood said.
“This is not something unique to Qatar, as management/board/shareholder sentiment is often a significant driver behind a merger taking place or not across the world. Having said this, current market conditions, namely the very competitive yet relatively small retail banking sector, declining margins in the corporate sector and the more cautious approach to government spending, all indicate that a merger between local banks could be a positive development, particularly as Qatar is a relatively small market where 18 QCB-regulated banks all compete,” he said.
“A few years ago, we all read about the possibility of a merger between IBQ and Al Khaliji Bank (which did not materialise), and we saw Barwa Bank combine with three other financial institutions, which was a positive transaction for the market,” Mahmood said.
On the general perception that increasing regulations are stifling the banking sector’s natural growth, he said, “That is certainly the view from the banking industry and it does have some merit, however the key question is whether this is a good thing or not? In our view the increasing regulatory scrutiny over banks is a positive factor for the long-term stability of the industry, despite impacting growth in the short/medium-term.
“In more developed markets, we have seen that when banks grow at above average levels, there are inevitably issues in long term. With a well and closely regulated banking sector, Qatar is helping protect its banks against any future shocks. Increasing regulation is not specific to Qatar nor is it something new. Regulators around the world have been under the spotlight ever since the 2008 crisis and emerging regulations whether it be Basel III, corporate governance, remuneration regulations etc…is the new paradigm we refer to throughout our report.”
Mahmood emphasised that GCC banks remained “resilient” with a “positive” long-term outlook despite economic uncertainties.
Asked how this optimism could be justified, he said, “The positive outlook is for the long-term and relative. 2016 will still be a challenging year for banks. However, we expect banks to be able to grow in the long-run (albeit at more reasonable levels), thanks to the over-arching support for the banking sector from GCC governments, along with growth expected as a result of infrastructure and committed government spending leading up to major events such as in Qatar with the FIFA 2022 World Cup and Dubai Expo. Our view is ‘relatively positive’ as compared to the very muted growth, and even declines, we have seen in many banks in more developed markets in recent years.”
Omar Mahmood
