Stable outlook for Qatari banks amid strong economy

The credit outlook for rated Qatari banks remains stable, reflecting continued macroeconomic improvements, solid financial performance and expanding bank franchises, Moody’s Investors Service said in its new Banking System Outlook for Qatar.

The report also noted some significant credit and funding concentrations and the  increasing level of competition.

“Not only has the operating environment for Qatar‘s banks remained strong, but the country’s high level of prosperity also continues to offer new and better-quality banking opportunities. Qatari banks are also gradually developing and enhancing their franchises by expanding their product ranges — especially in retail and Islamic banking — and their operations overseas,” said Constantinos Pittalis, a Moody’s Vice President-Senior Analyst and co-author of the report.

The bank financial strength ratings (BFSRs) additionally incorporate the fact that Qatar‘s domestic economy is dominated by a relatively small number of major corporate groups and government-related entities, leading to funding and credit concentrations for the banking system as a whole — an ongoing concern, in Moody’s view. The rating agency also highlighted that the aggressive loan growth in recent years poses a threat in the event of a potential deterioration in economic conditions.

Qatari banks’ financial metrics are strong and have improved further over the past year. Profitability remains very high, reflecting strong and sustainable underlying revenue growth, a very low cost base, low provision charges and the zero corporate tax rate. Asset quality has also improved significantly, with a declining level of non-performing loans that are adequately provisioned. Furthermore, the banks remain well capitalised and enjoy high liquidity, although their funding profiles require further lengthening and diversification.

“However, growing competition from newly established and foreign banks will make it more difficult for the rated banks to further improve their BFSRs going forward,” noted Fimi Gostanian, a Moody’s Senior Associate and report co-author.

All three rated Qatari banks have foreign currency deposit ratings higher than their corresponding Baseline Credit Assessments (which are derived from their BFSRs). This is based on Moody’s assessment of a very high probability of systemic support for all three banks in the event of need. The outlook for the foreign currency deposit ratings is stable, in line with the outlook for the country ceiling for such deposits.