The stable outlook for Qatar's rated banks reflects strong macro-economic conditions, solid financial metrics and improving bank franchises, says Moody's Investors Service in its new Banking System Outlook for Qatar. However, the rating agency also notes credit and funding concentrations, increased competition and potential credit risk issues.
"The country's strong operating environment and high level of prosperity have brought new and better quality banking opportunities," says Constantinos Kypreos, a Moody's Analyst and author of the new report. The banks are also gradually developing and enhancing their franchises by expanding their product ranges -- especially in retail and Islamic banking -- and via geographical diversification.
At the same time, Moody's ratings also incorporate the banks' significant funding and credit concentrations, growing competition from newly established and foreign banks (including those that will be based in the Qatar Financial Centre) as well as concerns with regard to potential deterioration in asset quality following the aggressive loan growth, the correction of the Doha Securities Market and the still developing nature of the banks' risk management systems.
The Qatar Central Bank (QCB) aims to exercise sufficient prudential control and supervision of the banking sector and to harmonise Qatari banking regulations with international standards as well as address specific risk areas. Nonetheless, Moody's considers that there is scope for further improvements, in particular on the qualitative aspects of banking supervision and on upgrading risk-assessment capacity.
Moody's notes that the Qatari banks' financial metrics are strong, and have improved further over the past year. The sector has seen strong and sustainable underlying revenue growth despite the inclusion of some non-recurring investment gains, as well as a low cost base and provision charges (although the rating agency expects the latter to increase going forward) and the zero corporate tax rate. Asset quality is also on an improving trend, with a relatively low ratio of non-performing loans to gross loans and adequate provision reserves. Furthermore, the banks remain well capitalised and enjoy high liquidity, although their funding profiles require further lengthening and diversification.
All three banks rated by Moody's have foreign currency deposit ratings higher than those inferred by their FSRs, reflecting the strong likelihood of support from the authorities in case of need. The outlook for the foreign currency deposit ratings is stable, in line with the outlook for the country ceiling for such instruments in Qatar.