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Abu Dhabi, UAEMonday 22 October 2018

Credit growth softens for Qatari banks indicating weak earnings, EFG Hermes says 

The banking system in May registered the softest credit growth in years

A vendor sells balloons at the Waqif Souq, in Doha. Qatar’s banking system in May registered the softest credit growth in years, confirming a weak earnings outlook this year. (AP Photo / Kamran Jebreili)
A vendor sells balloons at the Waqif Souq, in Doha. Qatar’s banking system in May registered the softest credit growth in years, confirming a weak earnings outlook this year. (AP Photo / Kamran Jebreili)

Qatar’s banking system in May registered the softest credit growth in years, confirming a weak earnings outlook this year for the country's lenders whose margins are also under pressure on lower public sector deposits and higher rates.

Qatar’s overall banking system loan growth slowed 2.7 per cent year-on-year in May, which compares with average monthly loan growth of 11 per cent year-on-year in 2017 and 8 per cent earlier in 2018, EFG Hermes said in a report.

The slowdown has come on the back of a sharp deceleration in the public sector’s credit growth, which has declined 8 per cent since the beginning of this year and 4.4 per cent when compared to the same period of last year.

“We think there are downside risks to our average loan growth estimate for Qatar of 8 per cent this year,” EFG Hermes analysts Elena Sanchez-Cabezudo and Ahmed El Shazly said in the report. “We had expected a slowdown in credit growth – slowdown in economic growth, mainly in real estate and tourism, and some large infrastructure projects almost completed, thus reduced financing needs from the government – but not as sharp as the May figures suggest.”

Qatar’s banks are struggling with lower profitability, deteriorating asset quality and squeezed margins amid the ongoing Arab quartet boycott by Saudi Arabia, the UAE, Bahrain and Egypt that has crimped economic growth, especially in the tourism and construction sectors.

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Qatar’s banks had their outlook downgraded to negative from stable by Moody’s Investors Service in August 2017 as operating conditions weakened and funding pressures mounted after the quartet cut ties with Doha on June 5 last year, accusing it of supporting terrorism.

Deposit growth in the banking system also slowed to 3 per cent in May from a year earlier. Total deposits are down by 8 per cent in May 2018 from December 2017 levels, mainly on the back of lower public-sector deposits, which have also shrunk by 8 per cent year-to-date, EFG Hermes noted.

The Qatari government tried to support its banking system with public sector deposits in the months following the implementation of the boycott but the lenders in the country believe it was one-off and do not expect similar inflows from the government this year, according to the EFG-Hermes report.

“Because of this, and given higher interest rates, which do not benefit Qatar banks [low share of low-cost deposits], banks are expecting a decline in margins this year,” EFG-Hermes noted. The lenders, it added, expect a decline of 10 to 15 basis points in margins, which already have been subject to some pressure in the first quarter of 2018.

“Slower loan growth and narrower margins will drive, on our estimates, low single-digit earnings growth for Qatar banks this year.”