DOHA: Despite high stability and strong profitability, severe exposure to real estate sector and aggressive expansion plans are key “weaknesses” of Qatar’s banking sector, according to S&P’s banking industry country risk assessment of Qatar.
Qatar’s real estate market is expected to recover from its sharp decline since 2009. But the commercial sector remains more vulnerable than the housing segment. This is one of the main risks faced by Qatari banking sector given its high concentration in lending to cyclical sectors like real estate and construction, the ratings agency noted yesterday.
“Qatar has seen significant commercial real estate development programmes over the past few years, which might be higher risk than the residential housing market. The main risk is that the office market becomes increasingly oversupplied and under occupied....”
S&P assesses Qatar’s lending and underwriting standards as “aggressive”. Concentration in the real estate and constructions sector is high at 20 percent of total loans at year-end 2012. In addition, foreign currency lending has recently increased dramatically and accounted for 51 percent of total loans at year-end 2012, it noted.
The assessment of industry risks reflects marginally stronger competitive dynamics and improved system wide funding for Qatari banks. After a few years of robust asset expansion, and even though Qatari banks’ risk appetite remains high, it expects lending growth to decelerate to about 15 percent in 2013 and the years ahead. The growth will be driven to a large extent by exposure to the government, government-related entities, and a handful of major local groups involved in government-backed projects, where the risks are more limited.
Lower lending growth should also slow recently rising funding needs. The recent improvement of domestic deposit to loan ration (94 percent in May 2013, compared with 87 percent in 2012) also reflects an increase in public sector deposits.
On the domestic debt-markets, the ratings agency noted the bond market has not really been tapped in the past. Qatari entities’ main issuances primarily by the government, GREs, and financial institutions-were completed on international markets. Lately, the government has significantly increased its borrowing in capital markets. Enlarged government debt has fostered the development of domestic capital markets and built up a domestic sovereign bond yield curve.
It also expects QCB’s new regulation from June 2013- which limits Qatari banks’ exposure to securities outside Qatar as well as equity, bonds and Islamic bonds in their investment portfolio- to draw more investments toward domestic securities and especially Qatari government bonds.
The S&P’s Ratings Services classifies the banking sector of Qatar (AA/Stable/A-1+) in group ‘4’ under its Banking Industry Country Risk Assessment (BICRA) criteria.
“Economic risks for the Qatari banking sector remain average in a global comparison. Qatar has made some progress toward diversifying its economy although it still depends heavily on oil and liquefied natural gas (LNG) production. We believe the economy will continue to show strong, although slowing momentum, reflecting Qatar’s robust private consumption and the significant infrastructure development programme,” the report noted.
The Peninsula
