Moody's rating boost for Qatari banks
Dubai, April 10, 2013
Qatari lenders will maintain strong financial metrics, including low levels of non-performing loans (NPLs), robust earnings and sound capitalisation, according to a report by Moody's Investors Service.
However these positive factors are counterbalanced by an undiversified economy heavily reliant on the oil and gas; the system's relatively high dependence on short-term foreign funding; and a still-developing corporate-governance and risk-management culture, said the report published today.
Moody's said it expects the government's extensive infrastructure investment programme will boost banks' business opportunities over the 12 to 18-month outlook period and lead to lending growth of between 20 to 25 per cent.
The outlook for Qatar's banking system remains stable, unchanged since 2010, ratings agency added.
However, Moody's acknowledges that downside risks to the supportive operating environment stem from increased geopolitical tensions that could threaten Qatar's export capacity and, over the longer term, the impact of adverse changes in oil and gas prices (the hydrocarbon sector accounts for around 60 per cent of the country's GDP).
Qatari banks' asset quality will be supported by the country's strong economic environment, the substantial government spending and the sizeable proportion of government-related loans (43 per cent of the total).
As such, Moody's expects that the system's NPLs will remain at around 2 per cent of gross loans over the next 12-18 months.
However, the banks' asset quality remains exposed to event risk given:
*The high single-party exposures and opaque transparency surrounding local conglomerates;
*The still-questionable commercial rationale for many of the government-related projects financed by the banks;
*Rapid credit expansion, which raises questions about banks' underwriting standards and ability to manage related risks; and
*The moral hazard that past government interventions have created.
In addition, the banks' still-high dependence on short-term foreign-market funding leaves banks vulnerable to market conditions.
The system's Tier 1 ratio will likely trend down to 15 to 16 per cent by end-2013, as banks continue to finance their fast-growing balance sheets domestically and abroad,said the ratings agency.
However, Moody's notes that projected capitalisation metrics are sufficient to absorb losses and remain above the regulatory minimum of 10 per cent even under the rating agency's 'adverse' scenario, which considers the impact of a sustained drop in oil and gas prices and significant contraction in economic activity.
On its future outlook, Moody's said it expects Qatari banks' 2013 bottom-lime profitability metrics will remain broadly stable, with the return-on-average-assets ratio ranging between 2.2 to 2.4 per cent.-TradeArabia News Service