DOHA JEW­ELLERY AND WATCHES EXHIBITION 2016

QATAR BANKS ARE CAUGHT IN THE CROSSHAIRS OF WEAK OIL PRICES AT THE MOMENT. UN­TIL A YEAR AGO, THEY WERE UN­STOP­PABLE – POST­ING PROF­ITS, FUND­ING PROJECTS, ACQURING BANKS ABROAD – BUT DIP­PING OIL PRICES HAVE BEEN PINCH­ING THEM IN RE­CENT TIMES. QATARTODAY TAKE

Qatar Today - - INSIDE THIS ISSUE - BY V L SRINI­VASAN

Marvel at the sight of the world's most pre­cious in­no­va­tions and Doha's best col­lec­tions un­der one roof. Gems, stones and watches not to be missed!

Mak­ing prof­its has been the hall­mark of Qatar's banks which were awash with ad­e­quate liq­uid­ity for many years. They were in­volved in fund­ing mega projects, played an ac­tive role in de­vel­op­ing re­tail banking by sanc­tion­ing ve­hi­cle and per­sonal loans to thou­sands of ex­pats who came to the coun­try in droves be­sides sup­port­ing the small and medium-sized en­ter­prises in the coun­try to the hilt.

These banks were prob­a­bly first among their peers in the world to have met the Basel III stip­u­la­tions, which will come into ef­fect in 2019, as they main­tained ad­e­quate cap­i­tal and liq­uid­ity in view of their healthy growth over the years.

Chal­lenges ahead

A glance at the lat­est an­nual state­ments of the ma­jor­ity of these banks shows that liq­uid­ity is go­ing to be the big­gest chal­lenge for them if oil prices do not re­cover in the next cou­ple of years and they need to take re­me­dial mea­sures so that they do not lag be­hind when the Basel III norms come into force.

Ac­cord­ing to the fi­nan­cial state­ments, the net prof­its of Qatar In­ter­na­tional Is­lamic Bank (QIIB) and Com­mer­cial Bank of Qatar have dropped in 2015 com­pared with the pre­vi­ous year. While QIIB's net profit in 2015 was QR784.2 mil­lion com­pared with QR825.8 mil­lion in 2014, the cor­re­spond­ing fig­ures for Com­mer­cial Bank were QR1.45 bil­lion and QR1.6 bil­lion, re­spec­tively (see chart 1).

Com­mer­cial Bank's Vice Chair­man and Man­ag­ing Di­rec­tor Hus­sain Al Far­dan says that the fi­nan­cial re­sults for 2015 were af­fected by slow­ing eco­nomic growth in the mar­kets in ad­di­tion to higher than av­er­age pro­vi­sion­ing taken by the bank's

“The ex­pan­sion of oper­a­tions of Qatar-based banks in­ter­na­tion­ally is in it­self an in­di­ca­tion of the in­creas­ing strength and con­fi­dence of these banks to com­pete with other banks in the in­ter­na­tional arena.” HE SHEIKH AB­DULLA BIN SAOUD AL THANI Gover­nor Qatar Cen­tral Bank “We think banks will man­age their fund­ing pro­files more con­ser­va­tively, which should trans­late into lower growth. We also ex­pect credit losses will in­crease given the eco­nomic slow­down and the pres­sure we ex­pect in some sec­tors, such as con­tract­ing.” FEVZI TIMUCIN ENGIN Di­rec­tor, Fi­nan­cial In­sti­tu­tion Rat­ings - CEEMEA Stan­dard & Poor’s

UAE as­so­ciate. “The fun­da­men­tals of our busi­ness, how­ever, re­main strong and our strat­egy firm: to con­tinue to build upon our 40-year heritage, fur­ther de­vel­op­ing a fi­nan­cial in­sti­tu­tion de­signed to meet our cus­tomers' chang­ing needs,” he adds.

A re­cent re­port by KPMG in Qatar re­vealed that com­bined net prof­itabil­ity of listed banks in­creased by 4% from the year ended De­cem­ber 31, 2014, as com­pared with the 13% and 8% growth rates for the prior two years. The col­lec­tive asset base of all banks has in­creased by 11% (up by QR110.1 bil­lion) from De­cem­ber 31, 2014, which is pri­mar­ily due to the in­crease in lend­ing port­fo­lios by QR105.6 bil­lion (16.3%), although at a lower level than in pre­vi­ous years. This was pre­dom­i­nantly due to a grad­ual ac­cel­er­a­tion of in­fra­struc­ture projects as Qatar gets closer to 2022, with growth pre­dom­i­nantly from the mar­ket and specif­i­cally in the cor­po­rate sec­tor. Gov­ern­ment and gov­ern­ment-re­lated en­ti­ties still ac­count for a sig­nif­i­cant por­tion of the as­sets of listed banks at around 32%, slightly down from the 35% last year.

Whilst de­posits grew at 11.2% (up by QR74.7 bil­lion), the ‘due to banks' bal­ances had a growth of 28.3% (up by QR22.9 bil­lion) as banks looked to di­ver­sify their fund­ing base dur­ing the same pe­riod. The gov­ern­ment and gov­ern­ment-re­lated con­tri­bu­tion to the de­posit base of listed banks ac­tu­ally de­clined by 4% from the prior year as a re­sult of the eco­nomic con­di­tions im­pact­ing Qatar and the wider re­gion, which also con­trib­uted to the tight­en­ing liq­uid­ity in the lo­cal mar­ket, the KPMG re­port says.

Mod­est re­sults

Part­ner at KPMG in Qatar and Head of Fi­nan­cial Ser­vices for the Mid­dle East and South Asia Omar Mah­mood points out that listed banks in Qatar have de­liv­ered a mod­est set of re­sults for the year ended De­cem­ber 31, 2015 com­pared with the prior year due to chal­leng­ing mar­ket con­di­tions.

“It's un­doubtable that the de­cline in oil prices has had a sig­nif­i­cant im­pact across most sec­tors in Qatar and banks have of course been af­fected. How­ever, as well as oil prices, there are a num­ber of other is­sues im­pact­ing the in­dus­try in­clud­ing geo-po­lit­i­cal un­cer­tainty, gov­ern­ment cost-re­duc­tion mea­sures and in­creas­ing com­pe­ti­tion, all of which have con­trib­uted to one of the low­est over­all profit growth rates in re­cent years for listed banks in Qatar.”

Ac­cord­ing to him, the rea­sons for this in­clude mar­gin com­pres­sion of costs of funds which have come un­der pres­sure as

banks have been forced to look at mar­ket and bank fund­ing, given the fact that the lower cost gov­ern­ment de­posits are harder to come by as a re­sult of the lower oil prices; im­pair­ment in in­creased in­vest­ment as mar­ket sen­ti­ment has been re­flected in equity prices as the lo­cal and re­gional stock mar­kets have seen a down­ward trend; tight­en­ing liq­uid­ity which has come un­der sig­nif­i­cant strain in 2015; and im­pair­ment charges on loans and ad­vances which have de­creased by 21% year on year. “With­out this re­duced im­pair­ment charge, the over­all prof­its of listed banks in Qatar would have de­clined year on year,” he says.

Mar­ket sen­ti­ment also ap­pears to be cor­re­lated with the fun­da­men­tals, as the share prices for all but one listed bank ex­hib­ited a down­ward trend in line with the over­all stock mar­ket. It is also of note that the share price of the five con­ven­tional listed banks has on av­er­age de­clined by a far higher per­cent­age (20.6% de­cline) when com­pared to their three Is­lamic coun­ter­parts (8.6% de­cline) – a pos­si­ble re­flec­tion of the greater mar­ket op­ti­mism in the Is­lamic banking sec­tor.

Mah­mood ex­plains that de­spite slower growth in 2015, the coun­try can re­main op­ti­mistic: “De­spite con­cerns over the global econ­omy, lower oil prices, and con­tin­ued re­gional un­rest, Qatar's econ­omy re­mains ro­bust, backed by the coun­try's strong re­serves and the gov­ern­ment's com­mit­ment to planned non-hy­dro­car­bon projects, as well as a ro­bust reg­u­la­tory regime, all of which we ex­pect to have a pos­i­tive im­pact on the banking sec­tor in the medium to longterm.” The banks will con­tinue to ex­plore in­ter­na­tional ex­pan­sion op­por­tu­ni­ties in the re­gion and out­side to help achieve their strate­gic growth plans, par­tic­u­larly given the con­straints noted above, and tap into the in­creas­ing num­ber of trade cor­ri­dors to and from the re­gion. “We ex­pect there to be a con­tin­ued trend to raise ad­di­tional longert­erm fund­ing and cap­i­tal, as higher Basel III cap­i­tal ad­e­quacy re­quire­ments come into force in a phased man­ner and banks look to ex­ceed the min­i­mum re­quire­ments to fund ex­pan­sion plans,” adds Mah­mood.

Qatar Cen­tral Bank (QCB) Gover­nor HE Sheikh Ab­dulla bin Saoud Al Thani said that the global ex­pan­sion of Qatar's banks is in it­self an in­di­ca­tion of the in­creas­ing strength and con­fi­dence of these banks to com­pete with other banks in the in­ter­na­tional arena. In an in­ter­view with The Busi­ness Year, he said that QCB was en­sur­ing that the ex­pan­sion should be

“It’s un­doubtable that the de­cline in oil prices has had a sig­nif­i­cant im­pact across most sec­tors in Qatar and banks have of course been af­fected. How­ever, as well as oil prices, there are a num­ber of other is­sues im­pact­ing the in­dus­try in­clud­ing geo-po­lit­i­cal un­cer­tainty, gov­ern­ment cost-re­duc­tion mea­sures and in­creas­ing com­pe­ti­tion, all of which have con­trib­uted to one of the low­est over­all profit growth rates in re­cent years for listed banks in Qatar.” OMAR MAH­MOOD Part­ner and Head of Fi­nan­cial Ser­vices, Mid­dle East and South Asia KPMG, Qatar

“With Iran look­ing for ex­ter­nal fund­ing to take up in­fra­struc­ture projects worth bil­lions of dol­lars, Qatar’s banks could ex­plore the pos­si­bil­ity of project fund­ing in and trade fi­nance with Iran.” AN­DREAS SCHWEITZER Co-founder and Vice Chair­man Ac­quarossa Terme SA Switzer­land

pru­den­tial. Lim­its have been fixed on the for­eign cur­rency gap. The ra­tio of for­eign cur­rency asset to for­eign cur­rency li­a­bil­ity of each bank should be at a min­i­mum of 100%. This means that short po­si­tions are not al­lowed, but long are al­lowed. “More im­por­tantly, QCB has been in the fore­front in im­ple­men­ta­tion of Basel III re­quire­ments. The cap­i­tal ad­e­quacy is be­ing mon­i­tored at both solo and con­sol­i­dated lev­els. The strength of the banks is also re­flected in their abil­ity to meet Basel III re­quire­ments with ex­cess cap­i­tal buf­fers and low lev­els of NPLs de­spite the per­sis­tence of low oil prices,” he added.

He has a point to score as Qatar Na­tional Bank an­nounced last De­cem­ber pur­chase of Na­tional Bank of Greece's stake (99.8%) in its Turk­ish unit Fi­nans­bank for $2.95 bil­lion (QR10.74 bil­lion). The bank will fi­nance the pur­chase with its own funds and will re­main strongly cap­i­talised af­ter the ac­qui­si­tion.

“This trans­ac­tion is a sig­nif­i­cant mile­stone in QNB's vi­sion to be­com­ing a Mid­dle East and Africa icon by 2017 and a lead­ing global bank by 2030,” said Group Chief Ex­ec­u­tive Of­fi­cer Ali Ahmed Al Kuwari.

Tight liq­uid­ity

In its re­port “Qatari Banks' Prof­itabil­ity To Wane In 2016,” Stan­dard & Poor's Rat­ings Ser­vices said that Qatar's banks were likely to face tight­en­ing liq­uid­ity, slack­en­ing credit growth and weak­en­ing prof­itabil­ity dur­ing 2016. Although the drop in hy­dro­car­bon prices and the gov­ern­ment's stream­lin­ing of its pub­lic in­vest­ment pro­gramme are putting the brakes on the do­mes­tic econ­omy, banks' asset qual­ity held gen­er­ally steady while credit growth re­mained re­silient on the back of strong pri­vate sec­tor ac­tiv­ity in 2015, the re­port said.

Di­rec­tor, Fi­nan­cial In­sti­tu­tion Rat­ings – CEEMEA at Stan­dard & Poor's Timucin Engin says that the op­er­at­ing con­di­tions for Qatari banks will toughen this year, dent­ing their prof­itabil­ity. The Qatari pub­lic sec­tor with­drew some of its de­posits from the do­mes­tic banking sys­tem in the process in 2015 and the agency ex­pects more of the same in 2016 and fore­sees a fur­ther squeeze on banks' liq­uid­ity. Fur­ther trim­ming of gov­ern­ment spend­ing will likely re­duce pri­vate-sec­tor lend­ing op­por­tu­ni­ties.

“We think banks will man­age their fund­ing pro­files more con­ser­va­tively, which should trans­late into lower growth. We also ex­pect credit losses will in­crease given the eco­nomic slow­down and the pres­sure we ex­pect in some sec­tors, such as con­tract­ing,” adds Engin.

“By en­ter­ing the vir­gin Ira­nian mar­kets (as far as for­eign banks are con­cerned), Qatari banks would be able to tap into a ge­o­graph­i­cal area, close to their home fronts, which is un­ex­plored and ripe for po­ten­tially sig­nif­i­cant re­turns. And that area is Iran.” NI­CHOLAS MA­SOUD GI­LANI Se­nior Part­ner Ar­jan Cap­i­tal

Iran’s mar­ket

With lo­cal mar­kets al­ready sat­u­rated and not pre­sent­ing much op­por­tu­nity, banks in the Mid­dle East in­clud­ing those in Qatar are, due to ge­o­graphic prox­im­ity, look­ing at Iran, which is plan­ning to take up projects worth $200 bil­lion in the com­ing months af­ter all sanc­tions are lifted by the US and other coun­tries. While Qatar Na­tional Bank al­ready has a rep­re­sen­ta­tive of­fice in Iran, Emi­rates NBD, Dubai's largest lender, is in talks with prospec­tive clients in that coun­try and seek­ing le­gal opin­ion on en­ter­ing the Per­sian Gulf state.

“Qatar's banks should con­sider to ex­plore the Ira­nian mar­ket as the Western pow­ers have lifted sanc­tions af­ter both sides reached a nu­clear deal in July last year,” says An­dreas Schweitzer, an ac­tive in­vestor in Iran since 2009. Schweitzer, who serves on the board of di­rec­tors of var­i­ous Iran-fo­cussed in­vest­ment and ad­vi­sory com­pa­nies, in par­tic­u­lar Ar­jan Cap­i­tal Ltd, says that this was be­cause the Euro­pean Union (EU) banks are still hes­i­tant to do busi­ness with Iran as only the EU and the United Na­tions have lifted sanc­tions while the so-called sec­ondary Amer­i­can sanc­tions con­tin­ued against Iran for vi­o­la­tion of hu­man rights and also for aid­ing and abet­ting ter­ror­ism. “With Iran look­ing for ex­ter­nal fund­ing to take up in­fra­struc­ture projects worth bil­lions of dol­lars, Qatar's banks could ex­plore the pos­si­bil­ity of project fund­ing in and trade fi­nance with Iran,” says Schweitzer.

Be­sides so­cial in­fra­struc­ture, Iran is also look­ing for for­eign in­vestors in­vest­ing their money for up­grad­ing the tech­nol­ogy in its oil and gas in­dus­try, the energy sec­tor and, much needed, hos­pi­tal­ity, adds Schweitzer.

Ex­press­ing sim­i­lar opin­ion, Se­nior Part­ner with Dubai-based Ar­jan Cap­i­tal and in­vest­ment banker Ni­cholas Ma­soud Gi­lani says that not only Qatari banks, but also, all re­gional banks in MENA and In­dia should ex­plore en­ter­ing the highly lu­cra­tive Ira­nian banking mar­ket.

“By en­ter­ing the vir­gin Ira­nian mar­kets (as far as for­eign banks are con­cerned), Qatari banks would be able to tap into a ge­o­graph­i­cal area, close to their home fronts, which is un­ex­plored and ripe for po­ten­tially sig­nif­i­cant re­turns. And that area is Iran,” he says.

The po­ten­tial sec­tors in Iran which the Qatar's banks can ex­plore in­clude trade fi­nance, cor­po­rate lend­ing, project fi­nance (ex­tremely prof­itable es­pe­cially in sec­tors such as hos­pi­tal­ity, energy and petro­chem­i­cals and of­fice build­ings), debt cap­i­tal mar­kets, equity cap­i­tal mar­kets (list­ing of Ira­nian cor­po­rates on nonIran ex­changes) and wealth man­age­ment tar­get­ing the Ira­nian di­as­pora, says Gi­lani.

How­ever, the banking sec­tor in Iran suf­fers from two main chal­lenges like non­per­form­ing loans (NPLs) and in­ad­e­quate cap­i­tal as many Ira­nian banks are not Basel II and Basel III-com­pli­ant.

The Tier 1 cap­i­tal of many Ira­nian banks is weak. “For­eign banks, those that are well cap­i­talised, could en­ter the Ira­nian mar­ket ei­ther through joint ven­tures or en­ter in­de­pen­dently through the main­land or through the Kish Is­land Free Zone. The Kish Is­land Free Zone af­fords for­eign banks the choice of en­gag­ing in con­ven­tional banking where they do not have to op­er­ate un­der the Is­lamic sharia,” ex­plains Gi­lani.

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