Global credit rating agency Moody’s has upgraded its outlook on the Qatar’s banking sector to “stable” from “negative” as the pandemic challenges recede.
“This reflects our view that operating conditions for the banks have stabilised as the challenges of the pandemic and low oil prices reverse, and the economy recovers,” the rating agency said on its report.
Heightened tourism activity surrounding the FIFA World Cup to be held in Qatar in 2022 would also support the economy, it said.
Finding that the military conflict between Russia and Ukraine has increased global macroeconomic uncertainty, it said “but we expect banks to remain resilient as the dislocation in the global oil market caused by the conflict will keep oil prices higher supporting Qatari banks operating conditions.”
The banks’ loan performance remains strong despite some of the lenders having operations in countries with weaker economic conditions.
“The banks are well capitalised and we expect profitability to improve as higher interest rates boost income, but remain below pre-pandemic levels,” it said, adding domestic deposits are expected to grow, driven by higher oil prices.
The likelihood of government support for banks in financial difficulty remains high, according to Moody’s.
The rating agency expects Qatar’s real GDP (gross domestic product) to grow by 2.7% in 2022 (2.2% in 2021) after shrinking 3.6% in 2020 as a result of the pandemic and an associated decline in oil prices.
The economic growth will be spurred by some large infrastructure projects, government spending linked to the gradual increase in hydrocarbon production and higher oil prices, it said.
Activity in the non-oil sector, where the banks do most of their business, will revive as travel and lock-down measures imposed at the height of the pandemic are relaxed, it said, adding greater tourism activity related to 2022 FIFA World Cup hosted by Qatar will also contribute to economic growth.
Highlighting that asset quality will remain strong and broadly stable, Moody’s said “we expect problem loans to rise marginally, reaching 2.4% of total loans at the end of 2022 from 2.2% at the end of 2021.”
The modest increase will be driven by banks’ exposure to the domestic construction, contracting and real-estate sectors and some banks foreign operations.
Problem loans will remain low, nevertheless, benefiting from prudent regulatory oversight and extensive lending to the low-risk Qatari government and government-related organisations. Government-related lending stood at 31% of the loan book as of December 2021.
Moody’s said capital will remain solid, supported by good profit generation, and provides substantial loss-absorption capacity.
Tangible common equity at Qatari banks stands at around 15.6% of risk-weighted assets and capital remains resilient even under its high-stress scenario.
Highlighting that profitability will improve modestly but remain below pre-pandemic levels; it said “we expect Qatari banks’ net income to tangible assets to improve modestly by around 10bps to 1.3% in 2022, from 1.2% for 2021.”
This increase will largely stem from higher operating income due to a combination of higher net interest income and improved fees and commission income.
The banks’ strong efficiency will continue to support their profitability. Qatar’s small and concentrated population means that banks can reach customers without the need for an extensive and costly branch network.
The banks’ high provisioning coverage of 135% of problem loans means provisioning costs will likely fall, supporting bottom-line profitability.
Assuming a very high likelihood of government support, Moody’s said the government has pre-emptively supported its banks in times of stress and has never let a domestic bank default on its debt or deposit obligations.
The government’s capacity to support banks will also remain strong as indicated by the sovereign’s ‘Aa3/stable’ credit rating.