With rate of erosion stopping or getting reversed, Qatar’s banks are set to post rising net-interest income (NII) growth figures in 2014, a new report has shown.
Net interest margins (NIMs) have been showing strength since the second quarter of 2013 with the rate of erosion generally slowing down or stopping completely, Beltone Financial said in a report
The average margin of banks under coverage troughed at 2.87% in the fourth quarter of 2012 and rose to 3.18% in the second quarter of 2013 and 3.08% in the third quarter of the same year. Excluding Qatar Islamic Bank, the trough was seen in the first quarter of 2013 with expansion in second quarter and stabilisation in third quarter of last year.
In either case, the quarter-on-quarter erosion has stopped (or reversed), which is positioning the banks to post rising net-interest income (NII) growth figures going into 2014.
The margin stabilisation can allow banks to capture more profit and loss effect of the loan growth. Overall loans and private-sector loans are growing at a healthy rate despite slowdowns in public sector borrowing, which was in line with expectations. “We hold the view that as banks move into a new net interest margin regime, namely a flat one, revenue growth can reflect the loan growth more,” Beltone said.
Two leading private banks in Qatar are raising Tier-1 perpetual bonds, which can sustain private-sector credit growth going into 2014. This will increase real estate credit ceilings that had been reached in multiple banks and had been effectively reigning in overall growth rates in the private banks in FY2012 and early FY2013. This is in the current context of domestic private loan growth already above public loan growth for the first time in several quarters, the report said.
On managing domestic and external risks ahead of FIFA World Cup 2022, Beltone said it sees a risk of higher funding costs in the country. The banking sector in Qatar is largely dependent on foreign liabilities to finance strong demand for credit.
Data shows that commercial banks’ foreign liabilities account for as much as 25% of total assets in Qatar, compared to only 5% for Saudi Arabia and 18% for the UAE.
Most of these foreign liabilities are in the form of wholesale funds, which are predominantly short term in nature.
“On the asset side, we are wary of credit dollarisation, with the share of foreign-currency denominated credit to the public sector reaching around 50% in October 2013, albeit down from 80% in January 2013.
“Any limited access to external funds could therefore force highly externally leveraged banks to liquidate some assets or seek dollar-denominated funds from the central bank to finance domestic lending requirements,” Beltone said.