By Martin Morris
Ratings agency says credit outlook negative for Qatari banking system as operating conditions weaken.
Credit ratings agency, Moody's, says the fundamental credit outlook for the Qatari banking system is negative, reflecting expectations of a weakening in operating conditions.
This follows many years of strong macroeconomic growth, which has fuelled the franchise development of Qatari banks.
In its new Banking System Outlook on Qatar the agency examines the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
While the direct impact of the international financial crisis on Qatari banks has thus far been limited, the agency's expectation is that the global recession will have an adverse effect on economic activity and the private sector's performance, including retail consumers, going forward.
"The negative outlook captures Moody's concerns about a deterioration in the asset quality of Qatari banks arising from, among others, decreasing demand in the property market, leading to falling real estate prices (as already seen in other Gulf countries)," says Elena Panayiotou, Moody's lead analyst for the Qatari rated banks.
Moreover, the direct and indirect exposure of Qatari banks to the increasingly volatile local stock market has worsened the sector's risk profile.
The negative outlook also reflects the agency's expectations that Qatari banks will experience a reduction in their profitability levels, mostly due to reduced growth in business volumes, squeezed interest rate margins (a reflection of increased domestic competition for customer deposits and higher credit spreads in the wholesale market) and potentially increased credit costs.
Funding and capitalisation levels are expected to remain adequate.
In an effort to increase liquidity levels and boost confidence in the system, the sovereign wealth fund, the Qatar Investment Authority, has announced a plan to inject a total of $5.3 billion into the local banking system by buying stakes of up to 20% in some Qatari banks. Moody's expects this move to strengthen the banking system's capitalisation.
It notes that relatively buoyant gas export receipts will continue to represent a strength for the Qatari economy and will offset to a certain extent potential weaknesses in other sectors of the economy.
While government expenditure will continue to create business opportunities for the large Qatari banks, particularly in the hydrocarbons sector, the agency believes that a prolonged period of global recession could result in revisions to the budgets of government investments, particularly for projects aiming to diversify local economic activity into sectors more vulnerable to adverse global economic conditions such as the hotel and tourism industry. Although Qatar's GDP per capita will remain among the highest in the world, the ratings agency anticipates a contraction in the country's nominal GDP in 2009.