Never letting a good crisis go to waste, to borrow a phrase from Winston Churchill, Qatar has used a three-year fall out with its Gulf neighbours to shore-up its economy and finances.
However, even the world’s richest nation per capita is not immune to the Covid-19 crisis, and growth is forecast to slow to minus 2% in 2020 after an estimated 0.6% positive growth in 2019, according to Fitch.
At the helm of the Gulf state’s largest Islamic lender Qatar Islamic Bank (QIB) is Bassel Gamal. While he says the impact of the virus on QIB’s first-quarter results was “not material”, he is aware that Qatar is not immune to the slowdown in global business.
The bank reported solid Q1 results, with its operating income increasing 3.8% vs Q1 2019, its net profitability up 0.3%, assets growth at 6.9%, and deposits increasing by 2.3% during the same period.
“In the short term, even the best-positioned banks will have to deal with some profit pressure,” he says. “Around the globe, business is temporarily slowing down, payments are deferred and emergency rate cuts are compressing margins.”
QIB’s conservative approach to risk has helped it to maintain a low non-performing loan ratio, which stood at 1.3% in Q1, one of the lowest in the region.
However, Gamal is mindful of future risks and even took the decision to increase the bank’s total impairment charge to QAR276 million, up 37% from Q1 2019.
“Although banks in Qatar have very strong capital and liquidity positions, they should also prepare for a mostly temporary deterioration of asset quality and get ready to manage effectively the quality of their portfolios,” he says.
“We anticipate some pressure on non-performing loans. However, given our historical conservative approach, we expect it to be manageable.”
Two thirds of total lending by Qatari banks is to sectors affected by Covid-19, according to Fitch: general services, trade, real estate and contracting.
However, Gamal says Qatar’s QAR75 billion economic stimulus package, which provides private sector support and additional liquidity to banks, will relieve the banks of some of the profitability pressures.
This crisis is creating a fundamental shift in customers’ behaviour, as people are forced to bank online and on their phones- Bassel Gamal, QIB
The bank has postponed financial instalments and due documentary credits with a waiver of profits on due instalments for three months.
It is also accepting applications for the government’s Covid-19 national response guarantees programme, administered by the Qatar Development Bank, which offers loans to help private sector employers meet salary and rental costs.
“While financing rates are being reduced and instalment deferrals are put in place, to a great extent this is counterbalanced by the liquidity and cheaper funds provided by the central bank, so we do not expect a material impact on our margins,” says Gamal.
The bank is also taking care to reduce its costs, identifying further measures to balance out the anticipated fall in business volumes and the increased costs in areas such as safety, communication and cyber-security. Its cost-to-income ratio was 22.7% in Q1 versus 23.2% in the same period 2019.
QIB has strong capital and liquidity positions with a capital adequacy ratio of 18.9%, as of March.
In January, it placed the first ever Reg S Formosa sukuk, dual listed on the Irish and Taipei stock exchanges, raising $800 million via a five-year note.
The bank has a $750 million bond maturing at the end of October and will assess its liquidity position and prevailing market conditions before taking a decision to refinance, says Gamal.
While the current lockdowns and social distancing may be temporary, Gamal believes the use of digital banking will be more permanent.
“This crisis is creating a fundamental shift in customers’ behaviour, as people are forced to bank online and on their phones,” he says.
QIB has invested heavily in its digital offering and was one of the first banks to go live with the mPay digital wallet initiative in March. Qatar’s central bank is promoting a cashless economy ahead of the World Cup in 2022.
It found new ways to import goods and even created its own domestic dairy industry, airlifting thousands of cows into the country- Nick Wilson, chairman of Gulf Investment Fund
Pick up for the bank’s digital services have accelerated in the past few weeks, with registrations on the banks digital channels increasing six-fold. Local and international transfers through QIB’s mobile app and internet banking platforms have increased by four times.
Six of its 27 branches remain open for urgent requests.
The bank has also made use of its digital channels to promote awareness of the virus to its customers, having collaborated with the ministry of public health and the Hamad Medical Corporation.
Qatar and its banks are not immune to lower oil prices, though the country’s hydrocarbon sector is weighted towards natural gas, leaving the country’s banks better placed to deal with the current crisis than their regional peers.
“Lower oil prices would normally have a more profound negative implication on the economy and government spending,” says Gamal.
However, with high-profile commitments such as the 2022 World Cup and related projects, he does not expect to see a slowdown in spending.
“This is important, since in the current environment, government spending is the backbone fuelling the wider economic activity,” adds Gamal.
He says the government will dip into is sovereign wealth fund to offset the lower income from oil and the subsequent impact on gas and liquefied natural gas (LNG) revenues. It was also able to raise a $10 billion bond in the international capital markets, showing continued investor commitment.
Nick Wilson, chairman of Gulf Investment Fund, says Qatar’s gas revenues, history of prudent budgeting by the government, ability to navigate the regional trade blockade and well-funded healthcare system make it an attractive investment.
He maintains an overweight position in Qatar and his fund is weighted 48% to financials.
“It found new ways to import goods and even created its own domestic dairy industry, airlifting thousands of cows into the country,” he says. “This same ingenuity – and financial flexibility – should continue to serve the nation well as Covid-19 disrupts economies.”