Qatari banks’ funding and liquidity profiles will benefit from normalisation of relations between Qatar and Saudi Arabia, Fitch Ratings says. “We expect Saudi clients to start shifting some of their funds back. This will provide Qatari banks with an additional pool of liquidity, which will diversify their funding base, reduce their reliance on price-sensitive government-related entity and corporate deposits, and cut their funding costs,” said Fitch Ratings in a report, yesterday. Qatari banks’ Issuer Default Ratings are on Stable Outlook as they are driven by Fitch’s view of an extremely high probability of support for banks from the Qatari authorities, should it be needed. The authorities have a strong record of supporting the banking sector, demonstrated most recently by their liquidity injections in response to the blockade.
Qatar’s banking sector is the most dependent in the Gulf Cooperation Council (GCC) on non-domestic funding, with foreign liabilities accounting for more than 45 percent of total funding at end-Q3, 2020. In contrast, foreign liabilities represented only 6 percent of total funding in the Saudi banking sector at end-Q3, 2020. High dependence on non-domestic funding is one of the contributors to Qatari banks having a weighted average cost of funding (COF) about 200bp higher than that of Saudi banks in Q3, 2020, and a weighted average net interest margin (WA NIM) about 100bp lower.
Saudi banks also benefit from a significantly higher portion of current and savings accounts, particularly retail deposits, which are fairly low-cost. Qatari banks with the weakest domestic franchises have the highest dependence on non-resident funding, which can exceed a third of total deposits in some cases. Some banks replaced some of their price-sensitive deposits with interbank borrowings in 2020 to reduce their COF and alleviate the pressure on margins due to the coronavirus pandemic.
The availability of additional sources of liquidity following the lifting of the blockade should also help banks to lengthen their maturity profile and reduce their reliance on short-term funding, which is particularly important for banks with net stable funding ratios below the 100 percent minimum regulatory requirement.
The normalisation of relations should encourage GCC tourists back to Qatar when the pandemic eventually eases. This should help reduce the pressure on the country’s distressed real estate and hospitality sectors, which are the largest sources of asset-quality problems for banks. The sector-average Stage 3 loan ratio is below 3 percent but the Stage 2 loan ratio varies significantly among banks, from less than 5 percent to nearly 30 percent, indicating significant underlying asset-quality pressure at some banks. Banks with the highest stock of Stage 2 loans are those with the highest exposures to the real estate and building contractor sectors.
