Moody’s has maintained a stable outlook on the Qatari banking system, driven mainly by its expectation of higher economic growth in the country.
Businesses in the non-oil-related parts of the economy is expected to benefit from projects linked to the expansion of Qatar’s liquefied natural gas (LNG) production capacity, it noted.
“Our stable outlook also takes into account the banks' strong capital and liquidity buffers, although these strengths will be counterbalanced by their weakening loan performance, particularly in the real estate, contracting and hospitality sectors.
“Consequently, loan-loss provisioning costs will likely remain high and, combined with stable operating income and costs, will keep profitability broadly stable,” Moody’s said in a report on Wednesday.
High oil prices will boost domestic deposits but reliance on confidence-sensitive foreign funding will likely remain high, increasing banks' vulnerability to shocks.
The likelihood of government support for banks in financial difficulty remains very high and its capacity to do so has improved.
Moody’s expect Qatar's real GDP to accelerate to 2.2% in 2024, from 1.3% in 2023, but down from 4.2% in 2022.
Non-oil growth will likely accelerate to 3.5% from an estimated 2% in 2023, benefiting from sporting events, business exhibitions and related economic activities, as well as projects linked to the expansion of Qatar’s LNG production capacity.
But this remains well below the 5.7% achieved in 2022, when Qatar hosted the FIFA World Cup and benefited from related infrastructure and investment activity.
As a result, Moody’s expects private-sector credit growth in 2024 to be around 3% to 4%. Still, an escalation of the ongoing conflict between Israel and Hamas presents the main geopolitical tail risk, according to Moody’s.
Qatari banks' capital benefits from good profit generation and provides substantial loss-absorption capacity. Tangible common equity stood at a high 16.8% of risk-weighted assets as of September 2023 and regulatory ratios remain well above central bank minimum requirements.
Moody’s expects Qatari banks' net income to remain between 1.2% and 1.4% of tangible assets in 2024. Growth in fee and commission income will balance a marginal drop in net interest income, keeping operating income broadly stable.
Provisioning costs will remain high as pressures on certain sectors, such as real estate, contracting and hospitality persist. Margins will be temporarily compressed by interest rate cuts in 2024, because interest on deposits and other funding costs will fall more slowly than interest received from loans.
That is despite the fact that funding is mostly short-term (less than one year maturity) meaning Qatari banks can respond to lower interest rates quickly.
The banks’ cost efficiency is the best among the Gulf Co-operation Council (GCC) banking systems, with cost-to-income at 22.9%. This is driven by Qatar’s small and concentrated population, which allows banks to reach customers without the need for extensive and costly branch networks. The banks' high efficiency supports their profitability despite costly investment in digital services and technology.
According to Moody’s high oil prices will boost flows of domestic deposits into the banking system. This will help compensate for the impact of prudential regulations aimed at curbing Qatari banks' overreliance on confidence-sensitive foreign funding, a result of their rapid growth.
The banks' foreign liabilities fell to 34% of total liabilities at the end of December 2023 from a peak of 39% at the end of 2021. Risks from volatility-prone foreign funding are partially offset by the fact that sources are well-diversified across geographies and maturities. In addition, Qatari banks' have stocks of liquid assets at around 25.1% of total assets as of September 2023 that provide a sound buffer. Most Qatari banks report high liquidity coverage ratios.
“We also expect banks to shift towards a longer-term funding structure in a lower interest rate environment,” Moody’s noted.
Qatari banks’ benefit from a very high probability of government support in a crisis. The government strong willingness to provide a backstop is shown by the pre-emptive support it has extended to the banks in times of stress and the fact that it has never let a domestic bank default on its debt or deposit obligations.
The government’s capacity to support banks has also improved, with the sovereign long-term issuer rating now at Aa2, Moody’s noted.