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QIB’s valuation will rerate!
/ 14 February 2011
The central bank of Qatar’s directive that conventional commercial banks close down their Islamic businesses is unquestionably negative for the sector but it could spawn spin offs of subsidiaries and sale of loan books to the pure Shariah compliant licenses operating in Qatar.
The Central Bank of Qatar wants to accelerate the growth and market share of state’s Islamic banks, which found it difficult to deal with the sheer economics of scale and brand dominance enjoyed by QNB, the de facto national champion and largest universal banking conglomerate in the emirate. There is also a policy advantage in boosting the size, capital base, liquidity, complexity and market share of Islamic banks whose lack of explicit lender of the last resort guarantees, legal ambiguities in loan and funding books and illiquid asset books all pose systemic risk, as the sukuk defaults in Kuwait proved in 2010.
Qatar has the potential to develop at least four regional, pure play Shariah compliant banks. QIIB, QIB, Masraf Al Rayan and Barwa Bank. These would be the obvious candidates to buy the Islamic loan books of QNB, Doha Bank and CBQ. This development’s endgame also means that the Qatari government would have two international banking champions, QNB in conventional/retail banking and Qatar Islamic Bank on Shariah compliant banking.
The CEO of QIB has confirmed his interest in buying entire loan books and branches from the conventional banks. The abrupt nature of the central bank directive means commercial banks can no longer open branches or accept Shariah compliant deposits, so QIB is the obvious beneficiarys as it dominates one third of the national Shariah compliant market in the first place. This is the reason QIB surged 9.4 per cent on February 6 as the Doha Securities Market after the central bank announcement. However, I was surprised that QNB shares also rose, meaning that the market does not expect the government to allow QIB to take advantage of any forced asset sales, since QNB has the biggest, fastest growing Islamic business among all Qatari banks. After all, Shariah compliant products generate more than 10 per cent of QNB’s loan book and profits. I am not sure if the central bank directive will delay the merger between International Bank of Qatar and Khaliji Bank to create the third largest commercial bank in Qatar. However, it definitely inhabits the potential growth rate and potential scale of both banks.
Net net, investors in Qatari banks should overweight QIB, the clear winner from recent events. Like Malaysia, Qatar hopes that the existence of a national Shariah compliant champion will be critical in the evolution of debt new issues (sukuk), fund management and project finance in the fastest growing economy in the Middle East. This is a clear argument for a valuation rerating for QIB in Doha. The central bank’s decision also raises the size of the Shariah compliant banking market in Qatar. The CEO of QIB estimates 100,000 new clients would migrate to Islamic banks as a result of the new law. The Qatari rule could also be used as a model by other GCC central bankers. This will raise the size of the entire Islamic banking market in the GCC and Middle East, another argument for a QIB valuation rerating.
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