Qatar's banking sector is profitable and benefit from strong capitalisation and adequate liquidity, as "significant" jump in liquefied natural gas (LNG) production and its spillover effect on non-hydrocarbons will support credit growth in the next two to three years, according to Standard and Poor's (S&P).
In its latest report, S&P said Qatari banks are well capitalised with the total capital ratio and Tier 1 ratio, including capital conservation buffer for the whole banking system, remain well above the central bank’s minimum requirements of 12.5% and 10.5%, respectively.
Supportive shareholders, dividend payouts that tend to be below 50% and strong profitability are slated to contribute to stable capitalisation levels, it said.
The (profitability) trend is expected to continue with an only modest drop in net interest margins owing to interest rate cuts, it said.
"We expect banks profitability to decline slightly due to the lower interest rates and the replacement of external funding by more expensive local funding sources," it said, expecting cost of risk to trend down, thanks to the supportive economic environment and lower rates, which will give some breathing space to struggling realty exposures.
The rating agency said non-performing loans or NPLs will remain modestly elevated at about 4% in 2025 before dropping in 2026, when GDP (gross domestic product) and lending opportunities are expected to pick up amid the LNG expansion, but oversupply in the real estate and hospitality sectors would weigh on banks’ asset quality.
Asset quality should stabilise, thanks to interest rate cuts, precautionary provisions booked over the past few years, and the government's tourism and non-oil diversification push, it however noted.
"The contribution of Turkiye and Egypt to exposed Qatari banks’ lending books is likely to shrink further due to the depreciation of local currencies and lending growth in Qatar," S&P said.
Although geopolitical tensions in the Middle East are high, it however does not expect a full-scale regional conflict, and so anticipate macroeconomic conditions in Qatar to remain broadly “stable”.
Qatar's North Field Expansion project will increase LNG production (by about 35% by 2027 in its forecast), it said, expecting growth to temporarily average 5.8% in 2026-27 compared with an average 2% growth in 2024-25
A return to normal non-hydrocarbon economic activity, relatively flat LNG production until 2025, and completion of many capital projects imply lower requirements for credit, S&P said, forecasting slower domestic credit growth in Qatar of around 5% in 2025-26 against 11% average in 2019-20.
Finding that most of the major infrastructure projects have been completed, softening the need for external funding; S&P said "we expect local funding sources will fund credit expansion in 2025-26."
In the first nine months of 2024, domestic deposits increased by about 5% compared with less than 1% growth in 2023, it noted.
Bank Street. PICTURE: Shaji Kayamkulam
