Posted on July 21, 2015

With the Qatar Central Bank ( QCB ) stipulating banks to set the loan-to-deposit ratio to 100%, starting from 2017, the sector may witness some pressure on lending capacity and intensified competition in deposit mobilisation, according to global credit rating agency Moody's, said Gulf Times.

Finding that the QCB recently introduced a loan-to-deposit ratio cap of 100%, to be implemented by 2017 over a three-year period, Moody's said this would put some pressure on banks' lending capacity. Given that the current level is 108% sector-wide, Moody's expects the banks to maintain a relatively high growth trend (10%-15% for 2015). "As such, we also expect competition for deposits to intensify," it said without elaborating.

As a result of the shortfall, Moody's expects Qatari banks to increase their reliance on longer-term and costlier market funding to support growth over the outlook period (2015-17). While such trends will support compliance with Basel III liquidity metrics, such issuance (as per current definitions) will not ensure compliance with the above loan-to-deposit caps, Moody's said. Additionally, banks will be "more vulnerable" to shifts in investor sentiment as well as refinancing risks, it said, finding that market funding is 26% of total funding (excluding operating liabilities and equity) as of March 2015, marginally up from 25% in December 2014 and is the highest level seen within the GCC (Gulf Cooperation Council).

Stressing that banks will maintain "healthy" liquidity buffers; Moody's said "while we expect the banks' liquid assets to decline marginally over the outlook period, they should remain around a healthy 25% of total assets (down from around 27% as of December 2014)." The bulk of these liquid assets are in Qatari government securities (rated 'Aa2') which can be repo-ed with the central bank in times of market stress, according to the rating agency. Credit growth around 10%-15% will support operating profitability, offsetting the effect of margin compression from increased competition in a low interest-rate environment, it said.

Although Qatari banks' interest-rate margins stood at around 2.5% in 2014 (around 3.1% in 2010), Moody's expects that they will narrow further to between 2.2%-2.5% over the outlook period. This is because of increased exposure to low-yielding government (government-related) loans, rising funding costs driven by funding pressures and an interest-rate cap of 6% on the retail portfolio (which represented some 15% of loans as of March 2015) compared to the 8% average yield on consumer loans before April 2011.

Moody's also noted that Qatari banks' asset quality is among the strongest in the GCC, as indicated by system NPLs (non-performing loans) of around 1.6% of total loans as of December 2014. The coverage of NPLs by loan loss reserves at 104% as of December 2014 is "moderate" compared to regional peers.

Overall, NPLs have remained stable over recent years but borrower defaults in the corporate sector have meant that problematic exposures in this sector have trended upwards since 2010, it said. Extensive government borrowing has subdued the overall NPL levels and masks a low, but rising, impairment trend in the private-sector corporate book, it said, adding the increase in corporate NPLs is largely driven by a few borrowers, which highlights the banks' vulnerability to event risk stemming from large concentrations and the ongoing build-up of credit risk given the recent aggressive credit expansion.

"We do not anticipate any change in this structural vulnerability over the timing horizon of our outlook," Moody's said.

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