Qatari banks continue to have strong income-generating capability with their first half profit remaining strong despite higher provisioning costs related to the coronavirus outbreak, Moody’s Investor Service has said in a report.
The eight rated Qatari banks' combined H1 2020 results continued to be strong, although deteriorating slightly with an aggregate return on assets (ROA) of 1.3% in the first half of the year from 1.4% in 2019.
The combined net profit for these banks declined by 9% to QR10.5bn compared to the same period last year. Four of the eight banks reported lower net profits, Moody’s noted.
The decline in bottom line profitability was mainly driven by higher coronavirus-related provisioning, partially offset by cost savings.
“We expect that bottom line profitability will deteriorate slightly further in 2020 to a ROA of 1.2% in the context of slow economic activity; however, at these levels it will remain relatively strong. We project real GDP to contract by 4.1% in 2020, impacted by the coronavirus outbreak in conjunction with lower oil prices. However, we expect some merger activity in the current environment, as banks will seek opportunities to boost their profitability,” Moody’s noted.
Despite higher provisioning costs related to the coronavirus outbreak, the Qatari banks continue to have strong income generating capability.
The downside is also limited as the domestic government's footprint in the banks is significant as an owner, depositor and customer, insulating the banking sector to some extent to exogenous events.
Additionally, the stimulus and support package of QR75bn, equivalent to around 13% of nominal GDP, announced on March 15 is likely to limit the damage to some extent.
Measures introduced are (1) the central bank’s 0% repo facility intended to support banking sector liquidity,(2) Qatar Development Bank (QDB) lending initiatives to support small and medium enterprises (SMEs) towards their rents and salaries, (3) waivers of electricity and water bills, (4) deferral of taxes, loan payments, and (5) an increase in concessional financing for small and medium-sized enterprises (SMEs).
Total income rose by 6% to QR21.4bn in H1 2020 from QR20.1bn in H1, 2019, driven by a 4% increase in net interest income and a 14% increase in non-interest income.
All of the eight rated banks experienced growth in operating income. This was supported by credit growth of 9% year-on-year, despite a slightly lower net interest margin (NIM) of 2.1% in H1 2020 from 2.2% in H1 2019. Asset yields declined in light of the current lower interest rate environment to 4.5% in H1, 2020 from 5.6% in H1, 2019, offsetting the decline in cost of funds to 2.7% in H1, 2020 from 3.8% in H1, 2019.
A large factor contributing to the low asset yields is the decrease in interest rates. Additionally, a large part of the loan book, around 29% as of June 2020, is to Qatari government and semi-government entities, which are relatively higher credit quality and lower yielding loans.
“We expect that NIMs will narrow in the coming months, although to a limited degree as we expect liquidity pressures to ease and asset yields to stabilise,” Moody’s said.
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