Fitch Ratings-Dubai/London-26 March 2020: The spread of the corona virus will pressure Qatari banks' asset quality and funding volatility could recur. This does not trigger any rating action on the banks' Viability Ratings (VRs) at this point in time because banks have adequate capital buffers and healthy profitability. However, rating actions on the VRs cannot be ruled out if deterioration in the operating conditions intensifies, especially if there is significant weakening in asset quality, pressuring capital buffers, or in funding. All Qatari banks' Long-Term Issuer Default Ratings (IDRs) are driven by an extremely high probability of support from the Qatari authorities. As Fitch does not expect any changes in the Qatari authorities' propensity or ability to provide timely support to Qatari banks if needed, at least in the short-to-medium term, all IDRs are on Stable outlook.
Fitch expects more asset quality pressure at those banks that already have high Stage 2 loans and at those with higher real estate exposure. Given Qatar's relatively undiversified economy, domestic banks have highly concentrated exposure to the real estate sector, which is facing falling prices and rents as new capacity continues to be added to an already over-supplied market. The Qatar Central Bank's (QCB's) real estate price index has fallen 27% from its peak in November 2015 (over 8% in 2019) and we expect additional pressure because the coronavirus and travel restrictions will hit commercial real estate and hospitality sectors further. Real estate and contracting account for around 24% of domestic lending. However, we believe banks' real exposure is much higher given their holdings of real estate collateral and lending to high net worth individuals and investment companies that indirectly finance these sectors.
The sector average impaired loans (Stage 3) ratio was below 3% at end-2019. However, the proportion of Stage 2 loans varies significantly across banks from less than 10% of the loan book to close to 30%. Banks with an already large stock of Stage 2 loans are those with the highest exposure to the real estate and contracting sectors, indicating potential significant asset quality deterioration. Stage 3 loans are adequately covered by specific reserves, but Stage 2 coverage is below 10% for most banks. Forbearance measures by the QCB including six months credit extension will not be sufficient if pressure on the real estate sector persists for a prolonged period and will only result in delaying problem loans recognition. We think more forbearance measures could emerge and possibly affect loan classification.
The consequences of the coronavirus and lower hydrocarbon revenues will weaken government capital spending, which will in turn affect the operating environment. Fitch now forecasts Qatar's real GDP growth at minus 2% in 2020, after an estimated 0.6% positive growth in 2019. In March the government announced a QAR75 billion stimulus package to the private sector, which is equivalent to less than 10% of total private sector lending. This might not be sufficient to protect the banks' asset quality given that exposure to directly affected sectors including general services, trade, real estate and contracting represents around two-thirds of total sector lending. Qatari banks have adequate capital buffers (average CET1 and total capital adequacy ratios of 14% and 19% respectively at end-2019 against minimum requirements of 8.5% and 12.5%, excluding D-SIB buffers) but an increase in problem loans could erode these buffers quickly.
Qatari banks are among the most active issuers in the GCC in the international debt markets and non-domestic funding (mainly from Asian asset managers) account for around 40% of total funding and 25% of deposits. The banks' negative net foreign assets have more than doubled over the last two years to QAR319 billion at end-February 2020 due to the increasing dependence on non-resident funding. Some banks run net short foreign currency (FC) positons significantly above the QCB cap of 30% of equity as more than 50% of the sector funding is in FC.
Global market volatility and concerns over potential tightening of liquidity could impede banks' access to international capital markets for debt refinancing and also trigger non-domestic deposits withdrawals. In a scenario where confidence in capital markets is not quickly restored and non-domestic deposits are withdrawn and not replaced, liquidity pressures will materialise. Further to the outbreak, the authorities announced that the QCB would provide liquidity support to the banking system and this remains our base case. The government demonstrated its ability and propensity to replace deposits withdrawals during the blockade: around USD30 billion withdrawals in June-October 2017 were replaced by USD40 billion of liquidity injections consisting mainly of placements by the QCB, Qatar Investment Authority (QIA - the sovereign wealth fund) and the Ministry of Finance. The government's ability to support the banking sector is underpinned by more than USD200 billion (over 100% of GDP) in sovereign net foreign assets, including QCB FC reserves of around USD40 billion.
Banks have healthy profitability metrics. However, in a lower interest rate environment with the QCB cutting lending rates by a cumulative 175bp since early March and a potential increase in funding costs if liquidity dries up, margins are likely to come under pressure. This would add to an expected rise in loan impairment charges.
Copyright Press Releases 2020