Qatar's private sector credit growth to ease significantly but higher interest rates to support profitability: S&P

Qatar's private sector credit is expected to continue to grow at a "significantly" reduced pace through 2023, even as higher interest rates is slated to support profitability of the country’s banking sector, according to Standard and Poor's (S&P), a global credit rating agency.
Finding that credit to the private sector expanded by less than 1% at the end of May 2023, well below the growth rates of recent years; S&P said the completion of the country's major infrastructure projects in time for the 2022 FIFA World Cup means that credit to contractors is no longer required.
Trade and consumption lending are still likely to see the strongest growth, buoyed by the wealthy population and the still relatively high oil prices Qatar's liquefied natural gas prices are linked to, it said.
"Qatari banks' overall credit supply, as opposed to private sector credit, could decrease in 2023, as the Qatari government gradually reduces its debt burden," the credit rating agency said.
Expecting higher interest rates will continue to support profitability; it said some banks' balance sheets shrunk in the first half of 2023, but most lenders reported gains in net profitability, which supports its expectation that ROE (return on equity) will expand in 2023.
S&P said banks' underlying performance should bolster capitalisation, but potentially higher domestic funding costs and adjustments relating to the performance of subsidiaries in Turkiye could limit profit growth.
Finding that external indebtedness has started to reduce but remains a key risk; the rating agency said both lower demand and the introduction of new prudential regulations to disincentivise non-resident-driven balance sheet growth has led to a reduction of nearly 10% ($18bn) in total external funding between the end of 2021 and May 2023.
The reduction of almost 10% includes a decline in non-resident deposits of 37% and an increase in interbank lines of 25%, according to the report.
"We expect overall external liabilities will continue to decrease gradually for the rest of the year, as domestic funding sources replace shorter-term interbank borrowing. That said, replacing non-resident deposits with domestic sources will likely increase overall funding costs," it said.
Expecting a "slight" deterioration in asset quality, but robust public sector exposure remains "significant"; S&P said it anticipates that higher-for-longer interest rates and subdued real estate prices could put pressure on Qatari borrowers and retail sub-sectors. Additionally, macroeconomic strains in Turkiye and Egypt will likely contribute to loan losses in 2023, it added.