Widening net interest margins and higher non-interest earnings emboldened the profitability in Qatar's banking sector, whose operating efficiency and capital remains strong, according to Moody's, an international credit rating agency.
The Qatari banks, it rates, reported an aggregate net profit of QR22.2bn for full-year 2021, up 9% from a year earlier, largely driven by an increase in both net interest and non-interest incomes.
"We expect bottom-line profitability to continue to improve in 2022 as operating income continues to grow while provisioning efforts may ease," Moody's said.
Expecting Qatar's real GDP (gross domestic product) to grow by 2.7% in 2022 (3.3% in 2021) after contracting by 3.6% in 2020 as a result of the pandemic and the related decline in oil prices; Moody's said the economic recovery in 2022 will be supported by projects and spending linked to the gradual increase in hydrocarbon production, higher oil prices and robust non-hydrocarbon economic activity after a relaxation of travel and lock-down measures imposed at the height of the pandemic and tourism activity related to 2022 FIFA World Cup.
During 2021, net interest income increased, mainly due to lower interest expenses, Moody's said, adding total operating income rose by 10%.
The rise was largely driven reduction in interest expense due to the low interest-rate environment. Interest costs fell, while interest income remained broadly flat.
Combined with 4% lending growth, this pushed the net interest margin (NIM) to 2.2% for 2021 from 2.1% for 2020.
NIMs widened to 2.2% in 2021 from 2.1% in both 2020 and 2019 because a decline in asset yields in the current lower interest rate environment to 4% from 4.3% was more than fully offset by a decline in funding costs to 2.1% from 2.4%.
The funding composition of Qatari banks has shifted with increasing reliance on external funding, mostly driven by the larger banks in the system.
"We expect benchmark interest rates to rise this year and, combined with increased lending volumes on the back of robust economic growth, will support net interest income for Qatari banks over the next 12 to 18 months," it said.
Growth in operating profit was also supported by a jump in non-interest income, which rose 9% year-on-year, after declining 11% in 2020.
The increase was largely due to a combination of trading gains, an uptick in lending volumes and fee-generating activity, and a better financial performance by associates.
"The growth rate in non-interest income is likely to slow in 2022 as trading gains and one-offs normalise while the economic recovery continues to support fee-based income," Moody's said.
Terming operating efficiency as strength, it said the aggregate cost-to-income ratio further improved to 24% in 2021 from 25.2% a year earlier.
The banks improved their operating efficiency in 2021 through cost-control measures such as reducing staff and travel expenses, easing pressure on their bottom-line profit.
While the benefits of the cost control measures accrued in 2021, aggregate operating expenses for the Qatari banking sector increased by 5% for 2021.
On strong capital base, it said the banks expanded their capital buffers during the year, supported by strong earnings and solid profit retention.
The banks' combined tangible common equity rose to 15.6% of risk-weighted assets as of December 2021 from 15.1% a year earlier.
"We expect solid profitability to continue to support healthy capital buffers," it said.
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