affairs > bank notes
FOREIGN LOANS EASE LIQUIDITY PRESSURES WHILE FOREIGN BORROWING AMONG COMMERCIAL BANKS IN THE GCC HAS BEEN ON THE RISE IN RECENT MONTHS, THE TREND IS MOST PRONOUNCED IN QATAR. IN THIS ISSUE, QATAR TODAY DELVES INTO THE CAUSES AND IMPLICATIONS OF THIS PHENOMENON. BY AYSWARYA MURTHY
30 > QATAR TODAY > SEPTEMBER 2016
A
couple of months ago, Commercial Bank of Qatar announced that it had secured a three-year $166 million international loan (which had been increased from an original target of $100 million) from a consortium of primarily Japanese financial institutions. This isn’t an isolated incident by far and is only the latest in a lengthening list of foreign loans issued to banks in Qatar. According to Qatar Central Bank data, Qatari commercial banks owed QR196.3 billion ($53.9 billion) to banks abroad in May this year, up 53% from a year before, when the borrowing started to show a marked upward trend. Factoring in assets outside Qatar, the net foreign liabilities of Qatari commercial banks, excluding investments abroad, jumped to about 13.1% of total assets in May (one of the highest levels in the past decade) from 3.6% a year earlier, as per a Reuters report.
It isn’t difficult to fathom why. The Ministry of Development Planning and Statistics noted in a report this year that “lower oil and gas revenues have caused public sector deposits in the domestic banking system to shrink, tightening liquidity and driving banks to raise funds abroad.” In fact, banks have experienced a slowdown in overall deposit growth, to 6% in 2015 from above 20% during 2012-13. This is largely because of reduced deposits by government and related entities, including national oil companies, which are responsible for direct deposits between 10% and 35% in the GCC. While Moody’s banking outlook for Qatar is largely stable, that of the funding and liquidity situation is “deteriorating” and is being addressed by foreign lenders eager to tap into Qatar’s credit market. With the largest depositor in the system – i.e., the government – affected by sustained low oil prices, Moody’s expect the banks to raise
more expensive and confidence-sensitive market funding (which includes foreign borrowings to some extent) to sustain asset growth and moderate funding pressures, according to Nitish Bhojnagarwala, AVP Analyst at Moody’s. And this isn’t something expected to reverse anytime soon, considering the volatile rally in oil prices this year, which will continue to reduce the inflow of deposits into 2017. Deposits from government entities climbed to 42% of total deposits from 23% over the 2010 to 2013 period, but this has shrunk since then to 32% as of March 2016, constraining the banks’ capacity to fully finance their lending growth from domestic deposits. While Moody’s says the government’s recent jumbo debt issuance of $9 billion (primarily placed with international investors in May 2016) will partially ease the liquidity pressure in the system going forward, Qatari banks are also using their
additional borrowing capacity to support projects related to the World Cup and the Qatar National Vision 2030. Qatar leads the GCC in international loans and this can be explained to some extent by the government and its banks confident about borrowing (at attractive rates) from the international community who see Qatar as a stable economy and accordingly are willing to provide such liquidity. Under the circumstances, it’s a good option to fall back on. Especially considering how the various World Cup projects are at a critical stage that requires timely and continual funding. While Qatar and its banks have had their credit rating downgraded in the last couple of years, they are still able to raise debt easily in the international markets because of strong marco-economic fundamentals. However, “an increased dependence on market funding (in the case of Qatar, currently 28% of total funding as of March 2016) will raise refinancing risks and leave
According to Qatar Central Bank data, Qatari commercial banks owed QR196.3 billion ($53.9 billion) to banks abroad in May this year, up 53% from a year before, when the borrowing started to show a marked upward trend.
31 > QATAR TODAY > SEPTEMBER 2016
affairs > bank notes OIL PRICE VULNERABILITY HEAT MAP Banking System Indicators GCC Countries
Liquidity
Funding Struture
Profitability
Capital
Asset Quality
Government Support
Kuwait Qatar UAE Saudi Arabia Oman Bahrain Low
Moderate
High
banks more vulnerable to shifts in investor sentiment,” Bhojnagarwal says, even though the bank’s stocks of liquid assets (at 25% of total assets as of December 2015) is expected provide a solid buffer against liquidity pressures.
An increased dependence on market funding (in the case of Qatar, currently 28% of total funding as of March 2016) will raise refinancing risks and leave banks more vulnerable to shifts in investor sentiment.” NITISH BHOJNAGARWALA AVP, Analyst Moody’s 32 > QATAR TODAY > SEPTEMBER 2016
Moderate borrowing While the current level of borrowing doesn’t pose any systemic risk, there are signs that authorities may act to reduce funding pressures on banks as they increasingly chase more price-sensitive and potentially volatile non-resident deposits to make up the shortfall. According to Moody’s Banking System Outlook for Qatar, Qatar Central Bank’s announcement in 2014 that it will cap banks’ loan-to-deposits ratios at 100% by end-2017 might be relooked at or delayed, considering “this guidance combined with reduced flows of deposits will exacerbate the pressure on banks’ lending capacity, particularly given that: the current loan-to-deposit ratio is currently 102% sector-wide; and that we expect lower (but still high) credit growth of around 10% for 2016”. As mentioned in the Qatar Economic Outlook 2016-2018, “now, the deposit side of the ratio includes only customer deposits and not long-term wholesale funds, which have recently been the primary source of funding. Banks are still in negotiation with regulators to amend the loan-to deposit formula to include longterm wholesale funds in the denominator. The deadline for compliance may be postponed until end-2018, given liquidity issues faced by Qatar’s banks.” According to government sources, the central bank could if necessary use unconventional measures to assist banks, such as direct purchases of commercial bonds and special loans to or equity injections in them. “At current levels it would seem the regulator is comfortable, no special measures have been announced,”
Source: Moody's Investors Service
says Bhojnagarwala, also citing the loan to deposit ratio. “The refinancing risks related to increased market funding can be moderated by keeping a high stock of liquid assets. This currently stands at around 25% of total assets and provides a solid buffer against these pressures,” he adds. Pivot to Asia The aforementioned multi million dollarloan to Commercial Bank of Qatar was reportedly the first loan to a bank based in the six-nation Gulf Cooperation Council that was provided primarily by Japanese institutions. The seven lenders in the deal included Mizuho Bank as sole co-ordinator and bookrunner, as well as Gunma Bank, Shizuoka Bank and Fuyo General Lease. Agricultural Bank of China, State Bank of India and Bank of Taiwan also participated. Increasingly, other Qatari banks have also been opening channels to borrow from Asia. From investments to energy partnerships, Qatar (and the Middle East, to a larger extent) has been deliberate in developing deeper relationships with Asia and this is no different when it comes to raising loans. For Asian institutions as well, the region and its financial infrastructure are an important link to the emerging economies of Africa. It is this mutually beneficial environment that is fostering new credit links. Some analysis also suggest that this move also ensures minimum exposure to the debt crisis in Europe which has traditionally been a favourite market. “European banks are still in the process of delivering and focusing on core domestic markets which moderates some of the high levels of lending that historically came from Europe, leaving proportionately more for liquid Asian/Japanese banks,” says Bhojnagarwala