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Qatari banks’ profitability stays strong despite COVID-19: Moody’s

Qatari banks’ profitability stays strong despite COVID-19: Moody’s

Satyendra Pathak
Doha
Qatari banks continue to have strong income-generating capability despite higher provisioning costs related to the coronavirus outbreak, Moody’s Investors Service said in a report released on Tuesday.
The banks’ solid capital buffers will continue to support them as asset quality deteriorates and there is pressure on profitability from the coronavirus outbreak and lower oil prices, it said.
Total income of eight rated Qatari banks rose by 6 percent to QR21.4 billion in the first half of 2020 from the same period a year earlier, driven by a 4 percent increase in net interest income and a 14 percent increase in non-interest income.
The downside is limited as the domestic government’s footprint in the banks is significant as an owner, depositor and customer, insulating the banking sector to some extent to exogenous events.
Additionally, the report said, the stimulus and support package of QR75 billion, equivalent to around 13 percent of nominal GDP, announced on March 15, is likely to limit the damage to some extent.
In the first half of 2020, Moody’s said, Qatari banks managed to improve operating efficiency through costs control measures such as reducing travel expenses which eased the pressure on bottom-line profit.
Operating expenses decreased by 3 percent to QR5.5 billion in the first half of 2020 from QR5.7 billion in the same period last year and the cost to income ratio was down to 26 percent in the first half of 2020 from 28 percent in the first half of 2019.
“All of the eight rated banks experienced a lower cost to income ratio. We expect this trend to continue as we will see the full effect of the cost control measures, implemented in the first half of 2020, by the end of 2021,” the report said.
“Many banks are taking coronavirus-related provisioning preemptively as they expect problem loan formation in the sectors more exposed to the pandemic, such as hotels and restaurants, airlines, tourism and retail sectors amongst others,” the report said.
While small and midsized enterprises in the Gulf Cooperation Council (GCC) have had a greater impact on asset quality, the report said, in Qatar this has not been the case, as they account for a small portion of the system’s loan book, and are supported by Qatar Development Bank (QDB) guarantees.
All the rated banks reported an increase in provisioning cost, with the exception of one bank, where provisioning costs were high in 2019 and reported a lower expense in the first half of 2020 compared to the same period last year.
“We expect only a limited further deterioration in asset quality in the second half of 2020 as the banks’ lending books are heavily skewed toward government or related entities, accounting for 29 percent of total loans as of June 2020, and these loans will be more resilient. Retail exposure is mainly to Qatari nationals where job losses have been negligible, and the real estate market is in a cooling-off period for the past few years and new lending to the sector has therefore been relatively limited. Together these factors will limit the increase in provisioning costs, supporting Qatari banks’ profitability,” the report said.
Moody’s, however, expects total income to be lower in the second half due to lower business volumes.
Loan-loss provisioning costs rose to 26 percent of pre-provision income in the first half of 2020, from 17 percent a year earlier.
“We expect provisions to rise further, reflecting problem loan formation as weaker economic activity makes it harder for borrowers to meet their repayments, particularly in the real estate, construction and contracting sectors,” Moody’s VP-Senior Credit Officer Nitish Bhojnagarwala said.
“However, the banks’ large exposure to the strongly rated Qatar sovereign will shield overall loan performance to a large extent,” Bhojnagarwala said.
The banks preserved their capital buffers in the first half of 2020 and these are stable compared to the first half of 2019, supported by lower dividend payout ratios and still strong earnings.
The banks’ combined tangible common equity to risk-weighted assets (TCE ratio) remained relatively stable at 14.7 percent as of June, 2020 compared to 14.6 percent as of June 2019.
“Out of the eight banks, two banks experienced an increase in their TCE ratio in the first half of 2020. We expect that solid profitability will continue to support healthy capital buffers,” the report said.
Those solid buffers will continue to support banks as they face deteriorating asset quality and pressure on profitability from the coronavirus outbreak and lower oil prices, Moody’s said.

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