Qatar banking liquidity expected to improve further: QCB

Qatar’s banking sector liquidity is expected to further improve with the “full implementation” of Basel III liquidity standards as well as the “prudential guidelines” to reach the loan-to-deposit ratio of 100%, the Qatar Central Bank has said in a recent report. The trends from the upward movement in oil prices also augur well for the banking sector’s liquidity infrastructure through higher mobilisation of stable funds, the QCB said in its 7th Financial Stability Review released recently.Financial stability indicators (FSIs) provide further input to the changes in risk profile of the banking sector. With the implementation of Basel III capital adequacy norms in 2014, the banking sector capital adequacy ratio (CAR) slightly moderated. Growth in private sector credit, which attracts higher risk weight, is one of the reasons for this moderation. However, banks could maintain a higher capital than envisaged in the regulatory minimum of 12.5%. “The overall health of the sector was intact with low non-performing loans and higher coverage ratios,” QCB said. Even though the credit growth was mainly due to higher credit demand from the private sector, nonperforming loans did not go overboard. The impact on equity in the eventuality of non-performing loans becoming bad loan as measured by net NPL to Tier 1 capital ratio is also lower compared to last two years, the QCB noted.The cost-to-income ratios have inched up, indicating higher administrative cost compared to growth in operating income. Profitability ratios have marginally fallen. Return on average assets declined while net interest margin ebbed by 20 bps. Loan to deposit ratio reached a new high, due to tightness in deposit mobilisation coupled with higher credit demand from the private sector. Other liquidity indicator – bank’s medium-term liquidity position – also declined considerably, the QCB report showed. The Funding Volatility Ratio (FVR), a constructed balance-sheet-based measure that captures the risk from systemic liquidity, also increased, indicating a marginally elevated liquidity risk. The sectoral credit ratios indicate that higher private sector credit was mainly channelled towards the real estate sector. Contextually, the estimated Real Estate Price Index (REPI) remained high throughout 2015, the report said.Compared to this, the share of credit to consumption fell in 2015. Taking into consideration the growth in the non-hydrocarbon sector and the increase in population, revenue flows to the private sector in terms of rental income and returns from business activities are expected to improve, lowering the credit risk of the banking sector.The negative net open position with foreign currency, mostly in dollar, indicates that the liabilities in foreign currency of the banking sector have increased during the year. Large placement of deposit by the private sector and non-residents in foreign currency towards the last quarter of the year also resulted in the higher negative open position. Even though this could suggest impending vulnerabilities on account of exchange rate fluctuations, the possibility of the same is limited due to the fixed peg of domestic currency to the dollar, the QCB said.