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Qatar banks need to diversify income streams to grow

With a soaring economy and a gross domestic product expected to grow 16 per cent this year, Qatar’s economic outlook is among the world’s brightest. But the financial windfall that has showered it in wealth will not be sufficient alone to propel its domestic banks to a more dominant role in the Gulf region.

“In general, Qatari banks are a little bit behind their counterparts in the Gulf when it comes to development of their business models and diversifying their income streams,” said Douglas Beal, Partner & Managing Director at Boston Consulting Group Middle East.

Combined, Qatari banks represent 11 per cent of assets in the Gulf, research from Kuwait-based KAMCO shows, compared with 35.6 per cent in Saudi Arabia, 15.5 per cent in Kuwait, and 30.6 per cent in the UAE.

Although hurt by the impact of lower oil prices and the abrupt halt in the real estate boom, Qatari banks received substantial support from the government in the form of capital injections and facilities to remove poorly performing assets from their books.

As a result, no Qatari commercial bank declared a net loss in either 2008 or 2009.

“(Qatari) Banks should now seize the opportunity to begin developing the business models that will be required to serve wealthy individuals and a wealthy country, specifically by diversifying into businesses that bring them fee income — such as wealth management for high net worth individuals, or cash management for corporations,” Beal said.

“Banks that don’t make improvements in these areas risk acquisition by those who do.”

The tiny Gulf state, which sits on the world’s third-largest natural gas reserves, has emerged in recent years as an economic powerhouse, thanks to its copious supplies of natural gas.

It now is the world’s richest nation with the largest per-capita income, an obvious opportunity for wealth management.

While European or American banks collect income from both lending and fee-generating activities, Qatari banks rely mainly on the conventional banking business model of generating income from the spreads between deposits and lending.

There are 18 banks operating in a nation with a population of only 1.6 million, including four Islamic banks and seven foreign-owned lenders such as European behemoths HSBC and BNP Paribas.

“The country is overbanked, and this has already led to a few mergers and acquisitions in the sector since the beginning of this year. Also, with a small population and economy, it is hard for further expansion potential within Qatar,” said Janany Vamadeva, banking analyst at HC Brokerage.

Qatar’s Al Khaliji Commercial Bank said in May it was in early-stage talks to merge with International Bank of Qatar. Barwa Bank, a Shariah-compliant unit of Barwa Real Estate Co., is preparing to list its shares on Qatar’s Exchange soon and has already swallowed up First Finance Company and The First Investor.

Consolidation in Qatar could spark additional mergers and acquisitions in the wider region, some analysts said.

“We do expect consolidation to take place amongst banks in Qatar, as well as see an acceleration of consolidation amongst banks within the GCC (Gulf Co-operation Council). There are simply too many banks for the existing population for each to achieve economies of scale,” Beal said.

Bank regulation will also be an important issue for Qatari banking in the years ahead, analysts say. The relationship between the Central Bank of Qatar and the Qatar Financial Centre Regulatory Authority needs to be resolved, with a single set of licensing and supervision rules applied throughout the country.

With better regulation and many of Qatar’s energy projects coming on stream, opportunities for banks servicing them will evolve and grow, regional bankers say.

“Deposits are recovering, and into Q2, we’ve also seen loan growth starting to recover. The trend is moving in a positive direction, with provisions coming down. Operating results for Q2 have been robust,” Robert Pramberger, acting head of asset management at Qatar’s The First Investor. Though Qatari banks will never be able to shoulder the entire burden of financing huge infrastructure projects such as LNG plants, they can play a role in financing large local projects — participating in lending syndicates and putting their local knowledge at the service of borrowers or lenders.