Qatar banks' net profit returned to pre-pandemic levels in the first half (H1) of 2021, mainly on an increase in net interest and non-interest incomes, according to Moody's, a global credit rating agency.
The net earnings improvement is despite higher the provisioning charges, the rating agency said, highlighting that the lenders it rate reported an aggregate net profit of QR11.8bn, up 12% from the year-ago period.
Net interest income increased, mainly due to a sharp reduction in interest costs, it said, adding total operating income rose 11% to QR23.8bn in the same period in 2020.
The rise was largely driven by a reduction in interest expenses due to the low interest rate environment, it said, highlighting that the interest costs fell 16% year-on-year, more than offsetting the decline in interest income (3% versus the first half of 2020).
The result was an overall increase in net interest income, although net interest margins remained broadly stable at 2.2%, reflecting strong loan growth of 9% year-over-year.
"We expect total income to remain stable in the second half of 2021 as the benefits of lower interest costs have already been captured," Moody's said.
Despite the increase in net profit, the banks' aggregate return on assets, at 1.3%, was in line with the first half of 2020, reflecting solid asset growth of 9% between the two periods, the rating agency said.
Noting that the banks' income-generating ability remains strong amid higher provisioning charges related to the pandemic; it said "this reflects the Qatari government's significant footprint in domestic banks as a shareholder, depositor and customer, which to some extent insulates the banking sector from external events."
Loan-loss provisioning charges rose 35% to QR5.5bn in H1-2021, consuming 31% of pre-provision income compared with 26% a year earlier, it said.
Despite the increase, provisioning remained lower than some regional peers, at 0.86% of gross loans (annualised), it said, adding "we expect provisions to stabilise, reflecting recovering economic activity which is expected to remain below pre-pandemic levels, and supported by Qatari banks' large exposure to the strongly rated government."
Highlighting that loan quality remained relatively "stable" and strong despite the increase in provisions; Moody's said it expects the bulk of problem loans to emerge in sectors that are more exposed to the pandemic's effects, such as hotels and restaurants, airlines, tourism and retail.
However, the asset quality pressure is mitigated to some extent by the loan loss coverage ratio which stood at 157% as of June 2021.
"Nevertheless, we expect only a limited further deterioration in loan quality in 2021. The banks' lending books are heavily skewed toward government or government-related entities, which accounted for 33% of total loans as of June 2021," it said.
Highlighting that operating efficiency remains strength; the rating agency said while aggregate operating costs increased by 5% to QR5.7bn in H1-2021, cost-to-income ratio of these banks fell to 24.1% from 25.7% a year earlier.
On the capital base of the banks; it said their capital buffers grew in H1-2021 as tangible common equity increased compared with June 2020, supported by solid profit retention and still strong earnings.
The banks' combined tangible common equity rose to 15.3% of risk-weighted assets as of June 2021 from 14.7% a year earlier, it said.