HSBC's rich pickings in Qatar

HSBC was the first bank to bring ATMs to Qatar and now its global connectivity is making a difference in the country’s banking sector. HSBC CEO Abdul Hakeem Mostafawi talks to Arabian Business Qatar about inflation, overbanking and regulation.
Global connectivity is the real strength of HSBC, says CEO Abdul Hakeem Mostafawi
By Francesca Astorri
Fri 24 May 2013 11:31 AM

“We are number one and we are three times [the size of] number two.” This is how Abdul Hakeem Mostafawi, the CEO of HSBC Qatar, positions his bank among the group of international lenders currently plying their trade in Qatar. While this statement shows a strong sense of self-belief, the hefty presence of big local banks in the market means that there is no suggestion that Mostafawi is resting on his laurels.

As Mostafawi says, global connectivity is the real strength of HSBC. “Nobody has the same footprint that we have,” he says. “We are in a better position to serve multinationals because we, as a bank, are everywhere. If they want to open up activities in India or in Latin America, we are there as well. They need a bank to be there with them wherever they go and we are everywhere.”

With more than 6,900 branch locations in about 80 countries, “everywhere” is not a complete exaggeration.

HSBC’s net profit grew by an impressive fifteen percent in 2012, and the lender doesn’t appear to have been affected by the Qatar Central Bank’s decision to force conventional banks to pull out of Islamic financing operations.

“It didn’t have a significant impact because we were just getting into it [Islamic banking],” Mostafawi says. “It was just six months [after] we got into it, so in terms of our expectations for future growth it has an impact, but not a direct immediate impact.”

In reality, HSBC had only a few clients in its Islamic banking branch. It may not have been a huge portfolio, but Mostafawi believes that the trend towards Islamic banking is growing much faster than conventional banking. In that sense it could have been an interesting sector to explore in terms of future profits.

“Regardless [of the fact] that I don’t like it, it was the right thing to do for the country,” Mostafawi says. “You can’t take a liability from a conventional institution and use it in an Islamic bank because conceptually as an Islamic product that’s wrong. By having it both together, you have no choice but to do that.”

If 2012 was a positive year for HSBC, then the outlook for 2013 is also looking good.

“Our expectations for 2013 are even better because there are a lot of projects coming up; we are already hearing about tender bonds, bank guarantees already issued for some clients, so the trend in terms of economic activity is in an upward direction. So we are hopeful that 2013 is going to be better than last year,” says Mostafawi.

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The fortunes of banks in the Gulf state are generally looking healthy, which is perhaps unsurprising given that the country is rated as the world’s wealthiest per capita. Last month, Moody’s Investors Service said that the outlook for Qatar’s banking system remains stable, a reflection of the country’s economic environment, including a low level of nonperforming loans at well capitalised banks.

The “government’s extensive infrastructure investment programme will boost banks’ business opportunities over the twelve- to eighteen-month outlook period and lead to lending growth of between 20 percent to 25 percent,” the rating agency said in an e-mailed statement.

Qatari banks are backed by substantial government spending with their profitability remaining broadly stable, with the return-on-average-assets ratio as high as 2.4 percent. In addition, local lenders’ revenues are stronger than anywhere else in the Gulf. According to the Boston Consulting Group, Qatari banks hit an average of twelve percent revenue growth in 2012, outperforming other Gulf countries, none of which managed to break into double-digit increases.

But as Qatar is investing an estimated $160bn in infrastructure projects in the run-up to the 2022 World Cup, local enthusiasm for the project is being tempered by the fear of facing an old enemy: inflation. According to asset consultancy group EC Harris, inflation in the country could reach a whopping eighteen percent a year between 2016 to 2019.

“It’s going to be crucial the way the upcoming projects are going to be managed,” Mostafawi says. “If it’s planned well and spread over a longer time, then it will take inflationary challenges away. But if the projects are going to be squeezed in a very short period of time, I think it will create a big challenge in terms of inflation.”

According to the CEO, Qatar has already experienced a similar period during the Asian Games in 2006, when most of the infrastructure projects were concluded just two or three years before the event. But he wants to be optimistic.

“We still have a long time before 2022, so if they start at the right time we won’t have an issue, and I think they have learned from the Asian games,” Mostafawi says, adding that the problem with inflation in Qatar was very much related to the issue of doing too many things at one time.

If 2013 seems to be offering plenty of opportunities in terms of investments, HSBC is going to be selective, focusing on those sectors in which the bank has a competitive advantage.

“We are not going to do all the things that we see,” the CEO says. “We are going to focus on things in which we have competitive advantage, or things in which we are very good at. I think banks are looking at these things from that perspective, that they are not going to do everything same as everyone else, but banks will focus on things they can do better than anyone else.”

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Mostafawi is one of the few CEOs in the banking sector in Qatar who is not complaining about the country’s overbanking. With a bankable population of only around 600,000 people, and around eighteen different banks, Qatar has become ultra-competitive for the country’s lenders. The big fish in the market, of course, is Qatar National Bank (QNB), which has around a 45 percent share of all the local lenders. Other big local players are Commercialbank, Qatar Islamic Bank and Doha Bank, followed by a slew of conventional and Islamic lenders.

Of the seven foreign banks, HSBC may rule the roost — with around 3.4 percent of the total market share by the end of 2010 — but it’s something of a cutthroat industry. Other big-name global players are Standard Chartered and BNP Paribas, while regional giant Arab Bank and the UAE’s Mashreq Bank also have a presence.

But Mostafawi believes this works in favour of the customers. “It is overbanked but it’s helping the customers a great deal and it’s also pushing the bankers to do the right thing, bringing out more products, more services,” he says. Having said that, the CEO certainly isn’t too keen on the prospects of other lenders making their way to Doha.

“If you bring too many other international banks, it becomes too competitive, non-lucrative for people to invest, margins start to squeeze and banks invest within themselves less. You don’t want a situation like that, it’s not good for the country and not for the banks,” he says.

Another area in which Mostafawi is unconvinced of the need to change is that of free zones. Some experts in the country believe that local partner ownership and the lack of investor protection are still two concerns that are scaring away foreign investments from entering Qatar. Not unnaturally, some have said that Doha should follow the free zone model espoused by nearby Dubai. But Mostafawi doesn’t agree.

“I don’t think Qatar is looking at having a model similar to Dubai,” he says diplomatically. “With foreign investors you have to be careful with what you attract: don’t get in all the foreign investors and then later on look at what is good and what is bad and try to keep people out. It’s good to be smart from the beginning.”

“People always think that Qatar wants to be like Dubai, and I think they are two completely different models,” Mostafawi adds. “Qatar focuses on culture, education, on oil and gas. Dubai focuses on re-exports and tourism, because the model is different from the beginning because they don’t have oil and gas reserves and they have to look for alternatives.”

HSBC was named after its founding member, The Hong Kong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between Europe, India and China. If the bank was founded to create a financial bridge and support the economic and cultural exchange that comes with it, HSBC is still contributing to that purpose in Qatar.

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Middle East Banking: showing the way

The Middle East banking sector grew revenues by nearly seven percent in 2012, according to a new study by The Boston Consulting Group.

On the back of the 6.9 percent increase, profits rose 8.1 percent, stemming largely from extraordinary income sources, the report said.

While banks in Qatar grew revenues by twelve percent and banks in Saudi Arabia and Oman achieved high single digit growth rates, banks in the UAE, Kuwait and Bahrain achieved a revenue growth rate of five percent or below.

The report showed banks in all countries achieved above seven percent profit growth rates, except in Kuwait (three percent).

In 2012, loan loss provisions varied significantly by country, the report added.

Banks in Saudi Arabia and Kuwait had to build higher provisions due to increasing delinquencies in sectors such as real estate, construction, banks, financial services and manufacturing.

UAE banks were, on aggregate, able to significantly reduce the existing high provisioning levels by thirteen percent, Boston’s report said, adding that Bahrain banks also saw higher LLPs but with a less steep growth rate. The BCG index includes 32 banks from across the GCC capturing nearly 80 percent of the total regional banking sector.

Dr Reinhold Leichtfuss, senior partner and managing director in BCG’s Dubai office, said: “While the performance of Middle East banks settled at high single digit growth figures in 2012, it still compared very well with the international banks which experienced a further revenue decline.

“This provides the Middle East banks the opportunity to undertake the necessary investments in capabilities and regional expansion.”

The report said retail banking revenues in the GCC saw an uptick of four percent after a number of flat years, largely due to an increase in the three biggest markets — the UAE, Saudi Arabia and Kuwait.

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