Stable outlook for Qatar’s banking system

The stable outlook for credit conditions in the Qatari banking system is based on the country's enduring macroeconomic growth and the government's repeated interventions during 2009, Moody's Investors Service said in a new Banking System Outlook.
"For 2010, Moody's expects Qatari banks' pre-provision profitability to remain at good levels and to be supported by higher business volumes and a low cost base," explained Elena Panayiotou, lead analyst for Qatari banks in Moody's Limassol office. However, the banks' net profitability is likely to continue to be affected by elevated provisioning expenses.
"The current ratings of Qatari banks are supported by continued high levels of pre-provision profits, strong capital levels and a high loss-absorption capacity," said Panayiotou. Nevertheless, Moody's highlighted that, during 2009, the banks' credit quality fundamentals deteriorated largely due to elevated credit losses in their consumer lending portfolios and the loans that were extended to the construction and the real estate sector. Taken together, Moody's estimates that the banks' non-performing loans grew by 140% in 2009, resulting in elevated provisioning expenses and reduced bottom-line profits for most Qatari banks.
Moody's cautions that the increased credit risk assumed by Qatari banks in 2009 and the sizeable risk concentration levels on both sides of their balance sheets constrain any upward movement of the banks' ratings. A further constraining factor in terms of their risk assessment is the limited number of truly independent directors on their boards, a situation that is common to most banks operating in Gulf countries. Addressing both of the above issues will exert upward pressure on the banks' Bank Financial Strength Ratings (BFSRs).
Despite the modest slowdown in GDP growth in 2009, Qatar's economy continued to expand at a strong rate, with GDP growth expected to have reached 11.4% in 2009 (compared to 15.8% in 2008). For 2010-2011, Moody's expects the Qatari economy to expand at a rate of around 16%, mostly due to increased hydrocarbon production and elevated oil prices.
While the banks' business expansion slowed down in 2009 in line with the global downturn and the resulting greater caution towards lending, Moody's expects 2010 growth rates to gradually return to pre-crisis levels. This is likely to be supported by accelerated government spending in the hydrocarbon sector as well as in the non-oil sector of the economy in 2010-2011. Also, the banks' reinforced capital position — following the Qatari government's acquisition of a 10% stake in the local banks' capital — is expected to be deployed to grow their business activities.
Going forward, all three banks are likely to continue to benefit from a high level of support from the Qatari authorities, which provides an uplift to their deposit ratings. This support has been clearly demonstrated in 2009 and helped local banks maintain relatively good profitability levels while ensuring the sector's financial stability.
Specifically, the support came in the form of: a direct capital injection; the purchase of the banks' listed equity shares in the Qatari Stock Exchange; and the acquisition of part of the banks' real estate investment portfolio. These steps assisted the banks' financials by reducing potential losses on their books.
Despite increased competition in Qatar, Moody's noted that the three rated banks — Qatar National Bank (QNB), which is the dominant government-owned institution in the country, Commercial Bank of Qatar (CBQ) and Doha Bank — have well-established market positions which will continue to underpin their ratings.