By Satish Kanady
DOHA: Qatar Central Bank’s (QCB) newly announced decision to regulate Qatari banks’ investment portfolio is expected to drive more bank investments into the country’s capital markets, mostly into government securities.
Contrary to apprehensions expressed by a section of investors on the central bank decision, a leading investment bank, which analysed the impact of regulatory changes on Qatar’s seven leading banks noted the decision is likely to drive more bank investments in Qatar’s capital market.
The Bahrain-based SICO Investment Bank covers Commercial Bank of Qatar (CBQ), Doha Bank, Qatar Islamic Bank (QIB) and QNB on regular basis. In addition to these banks, it also analysed the possible impact of QCB’s decision on Ahli Bank Qatar (ABQ), Al Khaliji Bank (alkahaliji) and Masraf Al Rayan (MAR).
“We expect the new regulations to compel banks to shift their investment mix towards domestic securities, with a greater inclination towards domestic Government bonds…. The new regulations would increase the country concentration risk of banks’ investment portfolios”, Chiradeep Ghosh, a research analyst at SICO noted yesterday.
On the impact of the regulation Chiradeep said there should be greater demand for domestic government bonds, which can lead to a lowering of yields. The QCB is planning to issue QR1bn of Sukuk and QR3bn of bonds, which should generate considerable interest by the banks.
The QCB has directed banks to reduce their investment portfolios to 25 percent of Tier 1 capital, from 70 percent previously. Investment in domestic government securities, Central Bank and licensed domestic banks’ debt, are exempted from these limits. Due to this exemption, commercial banks may look at capitalising their opportunity by issuing fresh bonds at lower yields. Banks with lower leverage may also look to increase their lending portfolio, to protect their margins, he said.
The SICO analyst assumes that the total investments which the banks would have to shift to domestic government bonds would be assets above the regulated limit of 25 percent of Tier 1 capital and additionally investment equivalent to five percent of their Tier 1 capital. For instance, if a bank’s investment is currently at 32 percent of Tier 1 capital which exceeds the regulatory level by seven percent, then we must expect the bank to reduce its investment exposure by 12 percent ie seven percent plus the buffer five percent.
He said that government bond yields would generate a two percent lower yield than the yields on existing investment securities which it will replace. They also estimate that the overall negative impact on net income of Qatar banks would be less than 2.5 percent, except for alkhaliji.
On the QCB’s directive to curb the exposure to unquoted investments to 10 percent of capital within Qatar, and to five percent outside, the analyst believe the QIB might have to reduce its exposure to these unquoted securities at a discount to their fair value, which will impact its near-term earnings. CBQ’s exposure is also close to the regulated level. Regarding the regulation on real estimate limit for Shariah-compliant banks, Chiradeep noted the preliminary analysis showed that all banks are within the limit.
The Peninsula
