Higher capital position, sufficient liquidity and improved profitability resulted in lowering overall risk conditions in Qatar’s banking sector, the modified banking Stability Index (BSI) has shown.
“On an average the risk level in the current year is lower than that measured during 2018,” Qatar Central Bank (QCB) said in its 11th Financial Stability Review.
The banking Stability Index (BSI) and Banking Stability Map demonstrate the level of aggregate risk in the banking sector.
The risk index, QCB noted is constructed based on five risk factors in the banking sector including soundness, fragility, liquidity, profitability and inefficiency.
Each of the risk factors were measured through a single variable approach till the last review-FSR 2018.
In an attempt to improve the robustness of the Indicator as well as the banking stability map, the methodology of constructing the sub-indices as well as the Banking stability Indicator is modified.
“The stability map exhibits, banking sector’s soundness and fragility indices improved during the current year.
The banking sector also appears to have improved their efficiency levels considerably,” QCB said.
However, it noted “the element of risk in liquidity appears to have increased” as measured through the liquidity index. Increased wedge between credit and deposits might be one of the reasons for this higher risk level. However, as compared to 2017, the period banking sector experienced withdrawal pressure, the risk levels as measured through the liquidity index is reduced in 2019.
“Overall, the banking Stability Map indicates the aggregate risk level in the banking sector is lower in 2019 as compared to last two years,” QCB said.
The Financial Stability Indicators (FSIs) provide further input to the changes in risk profile of the banking sector. All core stability indicators, except the leverage ratio to measure vulnerabilities to solvency showed, the banking sector is highly resilient to increase in stress conditions. CAR has further strengthened, owing to QCB’s ongoing measures in strengthening the capital levels of the banking sector.
Net NPL to capital, which measures the extant of stress on capital from credit risk reduced considerably.
However, the leverage ratio marginally reduced, partially due to higher pace in lower risk weighted assets over growth in capital.
Overall, core soundness indicators shows distance to insolvency improved for the banking sector, QCB said.
The NPL ratio declined marginally reflecting improvements in timely and proper recognition of problem loans with the introduction of IFR-9 standards.
With the implementation of IFR-9 standards, banks have kept more provisions.
The decline in NPL ratio while increase in provisions, improved the coverage ratio.
Thus, the credit risk from delinquent loans appears to have reduced for the sector.
The profitability of the banking sector marginally increased as observed from higher RoAA and RoE over the last year, QCB said.
The higher return on assets and equity was mostly contributed by increase in net interest income.
The higher interest margin to gross income indicates that banks have comparatively reduced their borrowing cost as higher capital is available to generate income from earning assets.
Local banks were able to hold stable sources of funds at comfortable cost during the year facilitated them to improve their profitability, it said.
At the same time the banking sector could reduce its other expenses thereby improving the efficiency ratios.
Liquidity (as at end December 2019) improved considerably.
Assets side liquidity measured through liquid assets to total assets increased.
The liquidity available to contain the withdrawal risk from short-term liability also improved indicating the banks efforts to lengthen the maturity of their funded liability, QCB said.
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