Qatar banks look to calmer waters in 2025
15 January 2025
Doha’s lenders enter 2025 with a sense of quiet confidence, backed by broadly favourable macroeconomic trends shaped by still-solid oil prices and non-oil growth that will provide an uplift for operating conditions and loan growth.
Although these operating conditions are not as supportive for Qatari banks as for their peers in the UAE and Saudi Arabia, growth is nonetheless coming back to the sector, enabling banks to book more loans.
Credit growth is looking stronger. In the first 10 months of 2024, Qatari banks registered an annualised credit growth of 6.3%, more than double that of 2023, which was 2.9%.
“Resuming growth is supporting operating conditions for Qatari banks,” says Amin Sakhri, primary rating analyst at Fitch Ratings.
According to Sakhri, non-oil economic activity is also increasing. But it is the cornerstone hydrocarbons project, the North Field liquefied natural gas (LNG) expansion, that will likely give ballast to lenders in the next two to three years.
By the end of 2025, Qatari LNG production capacity will have risen to 110 million tonnes a year (t/y), ahead of a further increase to 126 million t/y by 2027. That sets the economy up well, with banks positioned to feel the impact.
“The LNG project, which benefits related sub-sectors, also supports credit growth. So there’s also another supportive element for Qatari banks,” says Sakhri.
Robust profitability
Profits have been healthy in the past year, benefitting from banks’ strong capitalisation levels and adequate liquidity.
Ratings agency Standard & Poor’s (S&P) expects this trend to continue with only a modest drop in net interest margins owing to interest rate cuts – and the impact of replacing non-resident funding (which is high in Qatar relative to other regional banking sectors) with higher-cost domestic funding sources.
Full-year 2024 results are awaited, but indications are it will have proved another solid year for banks’ bottom lines.
Qatar National Bank (QNB), which represents over 50% of total system assets – with just eight domestic commercial banks, it is one of the Gulf’s most concentrated banking sectors – reported a Q3 2024 net profit of QR4.5bn ($1.23bn), a 5.4% increase over the previous year. Loans and advances were up by 11% in the same period.
Profits were helped by still high interest rates in the first half of the year. While the lower interest rate environment will have some erosion effect on margins, Qatari banks are generally less sensitive to rates than other banks in the region.
Other metrics also look healthy. “We’ve seen the return on average equity increasing to 16.7% from 15.8% in 2023. This is despite still high loan impairment charges in Qatar, which are some of the highest in the GCC,” says Sakhri.
Property market uncertainty
One area of weakness is in the real estate sector, which has suffered from excess supply over a number of years, bringing down prices. According to Fitch, the banking sector’s exposure to the real estate and contracting sectors remains high, representing 17% of total sector lending.
“The real estate and construction sectors remain under pressure, and we see that in the banks’ loan books,” says Sakhri. “The cost of risk is still elevated in a GCC context, at 78 basis points in the first nine months of 2024 for the Qatari banking sector as a collective, well above the level observed in the UAE and Saudi Arabia.”
Those real estate pressures have contributed to higher loan impairment charges compared to the rest of the region. S&P envisages non-performing loans (NPLs) remaining elevated at 4% in 2025.
“If you look at stage 2 loans, the average for the Qatari banking sector is around 10-11%, whereas for the UAE and Saudi, it’s about 5%. Some of the smaller banks are heavily exposed to the real estate and construction sectors, leading to about a third of the loan book being classified as Stage 2, which is quite substantial,” says Sakhri.
However, Qatari lenders have tightened their underwriting standards in the real estate and contracting sectors, focusing on government-related projects and assignment of cash flow proceeds to reduce their repayment risks, notes Fitch. Some banks have also been reducing their exposure to these sectors.
In S&P’s view, while continued pressure on real estate prices could accelerate the migration of stage 2 loans to NPLs at some midsize banks, public sector initiatives and interest rate cuts will help prevent a more severe deterioration in asset quality.
Underlying strength
In any case, the sector’s strong capitalisation and conservative provisioning remain two core strengths. The average CET1 stood at a solid 15.5% at the end of September 2024. This, says Fitch, is further supported by strong provisioning practices, with 140% of stage 3 loans covered by provisions, among the strongest in the GCC.
Aside from the real estate exposure, the other key risk in Qatar is its long-standing reliance on external funding. The sector’s non-resident funding accounted for a still-high 42% of the banking sector’s funding at the end of October 2024, and the sector’s net external funding was a substantial 50% of GDP at the end of 2023.
There has been some change as GDP has grown, meaning total funding relative to GDP is decreasing. However, about half of the sector’s funding comes from external sources, which is not expected to reduce significantly.
“Yes, hydrocarbon revenues have been supporting domestic liquidity, but Qatari banks are really quite reliant on external funding. In Saudi Arabia and the UAE, you’re looking at 15%-20% coming from external funding, and Qatar has been traditionally more than twice that,” says Sakhri.
Looking forward, the broader positive impact from the LNG increase will provide improved operating conditions for Qatari lenders, which will impact on banks’ bottom lines – offsetting the lower credit demand that will result from the completion of a number of key infrastructure projects.
What’s more, notes Sakhri, lower rates mean the cost of funding will reduce, which is favourable for Qatari banks because they have some of the highest cost of funds in the GCC, and the impact on net interest margin will be less marked.
Put that together, and Qatari bank chiefs have reason to view the year as one in which the glass is half-full rather than half-empty.
MEED's February 2025 special report on Qatar includes:
> GOVERNMENT & ECONOMY: Qatar economy rebounds alongside diplomatic activity
> POWER & WATER: Facility E award jumpstarts Qatar’s utility projects
> DOWNSTREAM: Qatar chemical projects take a step forward
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