Qatar banking outlook remains stable, says Moody’s

The outlook for Qatar's banking system remains stable, unchanged since 2010, Moody's Investors Service said in a new report, reflecting a benign economic environment and the rating agency's expectation that Qatari banks will maintain strong financial metrics, including low levels of non-performing loans (NPLs), robust earnings and sound capitalisation.
However, Moody's said that these positive factors are counterbalanced by an undiversified economy heavily reliant on the oil and gas sector; a high dependence on short-term foreign funding; and a still-developing corporate-governance and risk-management culture.
Moody's expects that the government's extensive infrastructure investment programme will boost banks' business opportunities over the 12- to 18-month outlook period and lead to lending growth of 20%-25%. However, it acknowledges that downside risks to the supportive operating environment stem from increased geopolitical tensions that could threaten Qatar's export capacity and, over the longer term, the impact of adverse changes in oil and gas prices (the hydrocarbon sector accounts for around 60% of the country's GDP).
Qatari banks' asset quality will be supported by the country's strong economic environment, the substantial government spending and the sizeable proportion of government-related loans (43% of the total). As such, Moody's expects that NPLs will remain at 2% of gross loans over the next 12-18 months. However, the banks' asset quality remains exposed to event risk given the high single-party exposures and opaque transparency surrounding local conglomerates; the still-questionable commercial rationale for many of the government-related projects financed by the banks; rapid credit expansion; and, the moral hazard that past government interventions have created.
The system's Tier 1 ratio will likely trend down to 15%-16% by end-2013, as banks continue to finance their fast-growing balance sheets domestically and abroad. However, Moody's noted that projected capitalisation metrics are sufficient to absorb losses and remain above the regulatory minimum of 10% even under the rating agency's "adverse" scenario, which considers the impact of a sustained drop in oil and gas prices and significant contraction in economic activity.
Moody's expects that Qatari banks' 2013 bottom-lime profitability will remain broadly stable, with the return-on-average-assets ratio ranging 2.2-2.4%. Higher lending volumes, low provisioning requirements and banks' low cost bases will support the system's overall profitability. However, the banks' net interest margins will likely decline, due to the regulator's imposition of interest-rate caps on retail lending and banks' increased exposure to lower-yielding project finance lending.