Qatari banks' funding and liquidity profiles are expected to benefit from the end to the blockade on Qatar, according to Fitch, a global rating agency.

"We expect Saudi clients, who withdrew deposits from Qatari banks due to the blockade, to start shifting some of their funds back," Fitch said in its note.

This would provide Qatari banks with an additional pool of liquidity, helping to diversify funding base, reduce the reliance on price-sensitive government-related entity and corporate deposits, and cut funding costs, it said.

Although the blockade had led to the withdrawal of about $30bn of non-resident deposits from Qatari banks in June-October 2017, predominantly by Saudi Arabian depositors but also by some from the UAE, causing tightening of foreign-currency liquidity; Fitch said the Qatari authorities stepped in with $40bn of sovereign liquidity injections, consisting mainly of placements by the Qatari Central Bank, the Ministry of Finance and the Qatar Investment Authority.

Other non-resident deposits, mostly from Thai asset managers and other Asian depositors, were broadly stable at the start of the blockade and have since increased. Qatari banks' total non-domestic deposits accounted for 25% of their overall deposits at end of the third quarter of 2020, in line with pre-blockade levels.

Some banks replaced some of their price-sensitive deposits with interbank borrowings in 2020 to reduce their cost of funding and alleviate the pressure on margins due to the coronavirus pandemic, Fitch said.

"The availability of additional sources of liquidity following the lifting of the blockade should also help banks to lengthen their maturity profile and reduce their reliance on short-term funding, which is particularly important for banks with net stable funding ratios below the 100% minimum regulatory requirement," Fitch said.

The end to the blockade should encourage the Gulf Cooperation Council tourists back to Qatar when the pandemic eventually eases, it said, adding this should help reduce the pressure on the country's realty and hospitality sectors, which are the largest sources of asset-quality stress for banks.

The sector-average ‘Stage 3’ (impaired) loan ratio is below 3% but the ‘Stage 2’ (increased credit risk) loan ratio varies significantly among banks, from less than 5% to nearly 30%, indicating significant underlying asset-quality pressure at some banks.

Banks with the highest stock of Stage 2 loans are those with the highest exposures to the real estate and building contractor sectors.

Qatari banks' issuer default ratings are on "stable" outlook as they are driven by Fitch's view of an extremely high probability of support for banks from the Qatari authorities, should it be needed.

The authorities have a strong record of supporting the banking sector, demonstrated most recently by their liquidity injections in response to the blockade, it said.

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