Qatar’s banking sector risk is among the lowest in the Middle East, a new report by The Economist Intelligence Unit (EIU) has shown.
Qatar’s banking sector risk is the second lowest in the Gulf Co-operation Council (GCC) region and the entire Middle East (with the exception of Israel), EIU noted in its latest report. Only Saudi Arabia (risk score 33) is ahead of Qatar (38) in this regard.
Middle Eastern banks have “limited direct exposure” through investment in equities or bonds linked to financially stressed institutions in North America and Europe, it said.
GCC commercial banks had less than 5% of total assets and less than 3% of total liabilities involving US counterparts at the end of 2022, and although they have increased their financial links to European financial services providers in recent years—especially Saudi Arabia following an aggressive outreach strategy—their overall exposure remains manageable.
Banking sectors in the region’s key business and finance hubs located in the GCC states especially Doha, Dubai, Abu Dhabi, Bahrain, Riyadh and Kuwait City — appear “well positioned” to withstand the shocks emerging from financial markets in Europe and North America.
“These hubs hold the region’s key financial institutions and most developed banking industries and have started 2023 on a strong financial footing,” EIU noted.
For instance, EIU said total assets, customer deposits, net loans and net interest income — the difference between interest earned from lending activities and interest paid to depositors — for GCC listed banks have been on an upwards trajectory since the start of 2021 and these performance measures reached record highs in the fourth quarter of 2022.
The outlook for the banking industry in 2023 across the GCC and Israel looks reasonably bright given the expectation of strong international energy demand and associated investment and exports,
recovering tourism industries, buoyant non-energy business activity, major public and private investment programmes, and a continued boom in initial public offerings (IPOs), which had a bumper year in 2022.
Moreover, the GCC banking sector is likely to benefit from stable exchange rates and relatively low inflation, as well as the prospect of further consolidation across the industry amid the push to create lenders with larger revenue streams and operating efficiencies capable of supporting ambitious diversification agendas.
According to EIU, banks across major markets in the Middle East retain ample financial buffers in terms of core capital-adequacy ratios, liquidity coverage ratios and net stable funding ratios.
All these measures were comfortably above the minimum required levels as set out under Basel III requirements for banking sectors in aggregate and for major individual banks in 2022.
In addition, and specifically in the GCC, banks tend to rely much more on relatively stable domestic funding sources from government, corporate and retail depositors rather than external, market-sensitive finance — a characteristic that provides them with a degree of certainty and stability for core funding sources.
Banks across the Middle East retain the backing of governments with an active presence in the financial services sector, which can prove crucial in times of need to curtail runs on banks caused by depositors and investors seeking to withdraw funds or exit their investment positions.
This is especially the case in the GCC, where governments have a track record of stepping in with considerable support during times of need, as seen during the global financial crisis of 2008 and the early stages of the covid-19 pandemic in 2020.
For their part, GCC states have sought to improve financial services sector regulation and comply with international best practice to help to attract foreign investment and set the foundation for a stable environment that supports their own development and diversification agendas.
The Middle East has fared better than other regions during previous periods of financial instability, such as the global financial crisis of 2008. Limited direct exposure to risky foreign investments, a focus on traditional lending and savings mobilisation, strong regulation and financial buffers, and prompt and forceful policy action proved beneficial in the past and will provide some protection once again.
Moreover, limited integration into the global financial system of the region’s weaker states should militate against direct effects through the financial system.
However, an escalation of the current financial difficulties in major developed markets and a sharp deterioration in global financial conditions would most likely affect the Middle East through second-round effects and in various ways.
The region’s developed and developing banking sectors would probably suffer impacts on income statements and balance sheets caused by a contraction in global economic activity, trade and investment, volatile and bearish international energy markets, plunging overseas and domestic asset prices — including equities and real estate — and softer domestic business activity.
The Middle East’s major banking industries would remain well capitalised, but profitability and asset quality would probably suffer, to the detriment of regional economic growth and stability, EIU noted.
Qatar’s banking sector risk is the second lowest in the Gulf Co-operation Council region and the entire Middle East (with the exception of Israel), EIU noted in its latest report.
