(MENAFN - Arab News) The outlook on Qatar's banking system is stable, reflecting Qatar's strong macro environment and high public spending levels that will continue to sustain growth and bank lending activity over the 12-18 month outlook period, says Moody's Investors Service in a new Banking System Outlook published on Thursday. Moody's says that the stable outlook also captures (i) the banks' limited asset-quality pressures and healthy capitalization levels; (ii) a stable deposit base and significant liquidity buffers; and (iii) strong earnings potential.
The report also notes that these supportive factors are counterbalanced by (i) high levels of concentrations on both sides of the balance sheet;
(ii) the banks' dependence on the domestic economy, which is undiversified and heavily reliant on the oil and gas sector; and (iii) the credit risks relating to exposures to the construction and real-estate sector.
Moody's estimates that Qatar's real GDP will expand by 6 percent in 2012, driven by high oil prices, strong liquefied natural gas export volumes and accelerated public spending, which will stimulate the nonoil economy.
This, in turn, will support banks' asset quality, drive credit growth -- likely to be between 20%-25% during 2012 -- and increase bank revenues.
Non-performing loan (NPL) levels will likely remain relatively stable at around 2% of gross loans, supported by Qatar's strong macro environment and improvements in the credit quality of banks' consumer portfolios.
Following three rounds of pre-emptive capital injections by the Qatari government into the seven listed domestic banks between 2009 and 2011, culminating in a Tier 1 ratio of 20 percent as of December 2011, the sector's solid capital buffers provide high loss-absorption capacity, in Moody's view.
The rating agency says that core liquid assets - estimated at 34 percent of total assets in December 2011 - demonstrate that liquidity buffers are sound within the system, which remains predominantly deposit-funded.
Moody's notes that this will continue to benefit from the strong ties with the Qatari government, which contributed around 23 percent of sector deposits as of December 2011, forming a stable (though concentrated) funding source. However, the banks have increased their dependence on wholesale funding - primarily short-term foreign interbank balances - which account for approximately 33 percent of total funding as of December 2011.
In Moody's view, this degree of exposure leaves the banks vulnerable to shifts in market conditions and investor sentiment.
Return on average assets stood at 2.7 percent in 2011, one of the highest ratios amongst regional peers. Qatari banks' interest-rate margins will likely decline in 2012 due to the increased funding costs and the introduction of interest-rate caps on their retail portfolios. However, Moody's expects the system's overall profitability to remain at comfortable levels, supported by higher lending volumes, low provisioning requirements and banks' low cost bases.
However, Moody's notes that the supportive outlook factors are counterbalanced by the banks' high dependence on government-related business, which creates concentrations on both sides of the balance sheet. In addition, the banks' dependence on the domestic economy, which is undiversified, remains heavily reliant on the oil and gas sector, whilst the banks' aggressive loan growth and high construction and real-estate sector exposures continue to pose credit risks. Uncertainties regarding regional political developments also pose a tail risk to the benign operating environment.