Moody’s: Qatari banking sector stable but in need of diversification
The stable to positive outlook for the financial strength ratings of Qatar's banks captures the stable banking system structure and the banks' adequate financial fundamentals, while also taking into consideration their high concentration to the Qatari operating environment, says Moody's Investors Service in its new Banking System Outlook on Qatar.
As a result, Qatar’s banking system liquidity and external position remain hostage to state financing needs, which are in turn dependent on international oil prices. "Qatari banks are constrained by their size and lack of expertise," said Moody's Vice President/Senior Analyst and author of the annual report, Constantinos Pittalis.
The banks remain relatively unsophisticated in the range of services and products they offer and have been largely absent from the financing of Qatar's large-scale infrastructure projects. The only notable exception is Qatar National Bank, which remains the dominant bank in the country, reflecting its strong interrelationship with and majority ownership by the State of Qatar, Moody's notes.
However, all banks have benefited from peripheral activities, including the funding of smaller projects, the current account administration of multinationals operating in Qatar and the granting of personal loan facilities to both Qataris and expatriates.
Lending to the state is by far the largest sectoral exposure of the banking sector. Moody's is not especially concerned about the ultimate ability of the State of Qatar to discharge its obligations to the banking sector; however, the rating agency is concerned that at times of low oil prices, state lending increases significantly, resulting in liquidity tightening and in possible repayment delays.
At the same time, Moody's notes that the significant improvement in Qatar's fiscal position during the last three years suggests that the likelihood of any payment delays is currently very low.
The banks continue to enjoy satisfactory recurring earning power, underpinned by healthy interest margins and a low operating cost base. Although, in theory, the banking sector is open to competition, both from incumbent banks and potential new entrants, in practice, the banks continue to enjoy high interest margins.
The stable outlook for the bank deposit ratings reflects the stable outlook for the country ceiling in Qatar. The deposit ratings will remain linked to the country ceiling for the foreseeable future, as we believe that the state and central bank would not allow any banks to fail.
Future rating actions will be highly dependent on changes in the operating environment and on the ability of banks to diversify their business and revenue streams. Maintaining adequate profitability may become an issue for the future, as revenues from the natural gas projects begin to flow into the government coffers and the sector's exposure to the state consequently falls.
Moody's concluded that the challenge for banks would then be to seek profitable and creditworthy lending opportunities in the private sector without increasing their risk profiles. — (menareport.com)
© 2003 Mena Report (www.menareport.com)