Turkey exposure could be pain point for Qatar National Bank

Qatar National Bank (QPSC) registered its first annual profit decline since at least 2007 amid higher provisions, and analysts warned that its Turkey business could prove to be a pain point.

The Middle East and Africa's largest bank by assets nearly doubled its provisions in response to the coronavirus pandemic.

QNB made a net profit of 12.0 billion Qatari riyals in 2020, down from 14.35 billion riyals a year earlier. It took loan loss provisions of 5.83 billion riyals, versus 3.18 billion riyals in 2019, in what the government-controlled bank described as a "precautionary measure."

"QNB has a very large concentration of local public sector loans, so the increase in provisions was higher than our expectation," Chiro Ghosh, vice president for financial institutions at Bahrain's SICO Bank, told S&P Global Market Intelligence. "A large chunk of QNB's lending is outside Qatar, so an increase in provisions was anticipated — just not quite this large."

QNB's domestic unit represents around three-quarters of both its loan book and net profit, plus 59% of its deposits. QNB's operations include units in Turkey, Egypt and Europe, which account for 10.2%, 5.4% and 3.2% of loans, respectively.

Nonperforming loans

The bank's 2020 nonperforming loan ratio was 2.1%, up from 1.9% a year earlier as the value of its stage 3 impaired loans rose 32.0% to 16.95 billion riyals.

"QNB's provisions have increased but its NPL ratio is almost unchanged — there hasn't been any significant deterioration in asset quality," Elena Sanchez-Cabezudo, head of MENA financials, equity research at EFG-Hermes in Dubai, told Market Intelligence.

QNB's annual net interest income rose 4.0% to 21.0 billion riyals as the decline in the interest it paid in deposits more than offset a 17.5% drop in gross interest income. The bank's 2020 net interest margin fell 8 basis points year over year to 2.49%.

"That's not bad compared with what we've seen at most [Gulf Cooperation Council] banks recently, with interest rates down in most of QNB's markets," said Sanchez-Cabezudo, noting that QNB's funding costs were flat quarter over quarter.

QNB's loan-to-deposit ratio slipped to 98.0% from 99.2% as it took what it described as a more conservative approach to lending.

"Asset quality is under control with an increased provisioning buffer," said Jaap Meijer, managing director of research at Dubai's Arqaam Capital.

Net fee and commission income fell 18.8% to 3.02 billion riyals. Such income began declining from the second quarter due to lower retail banking volumes and as banks followed regulator guidance not to levy fees for certain services during the pandemic, said Ghosh, noting QNB's fee income has increased from its second-quarter low.

Turkey exposure

The main risk facing QNB in 2021 is a slower-than-expected increase in economic activity in the countries where it operates, said Sanchez-Cabezudo.

"That could cause a slight deterioration in credit quality," she said. "I'm not concerned about Qatar, where half its loan book is to the government. Turkey would be more of a concern."

SICO's Ghosh described 2020 as the bottom for QNB, predicting the bank's profit growth would resume in 2021.

"Provisioning will fall, fee income will improve, and operating costs will remain steady. Interest income will be driven by volume, not by margin," he said.

Ghosh predicted that QNB could face margin pressure, highlighting its exposure to Turkey and the slumping Turkish lira.

"We expect to see further devaluation in Turkish lira, which will impact QNB's overall profitability," he said.

Diplomatic rapprochement

Qatar's rapprochement with its Gulf neighbors will benefit the banking sector, Arqaam's Meijer told Market Intelligence. Saudi Arabia, Bahrain, Egypt and the United Arab Emirates this month ended an economic and political blockade imposed in mid-2017. The feud had led Qatari banks' non-resident deposits to plunge as the country's new-found foes withdrew their cash, but much of this could now return.

The end of the embargo could also create "opportunities for QNB to take part in the financing of some of the [Gulf's] mega projects," said Meijer, noting Gulf Cooperation Council loans were more than 4% of QNB's loan book prior to the blockade versus 2.0% currently.

On Jan. 7, rival Qatari Islamic lenders Masraf Al Rayan QPSC and Al Khalij Commercial Bank (al khaliji) PQSC said they had agreed to merge. Masraf Al Rayan will absorb Al Khalij into its operations.

After completion, Masraf Al Rayan will have assets worth around 172 billion riyals and its market share will increase by approximately 3 percentage points, making it a larger competitor to Qatar Islamic Bank, according to EFG calculations.

The merger could lead to further local M&A, but the deal itself will not alter the local banking industry's dynamics significantly, Sanchez-Cabezudo said.

As of Jan. 12, US$1 was equivalent to 3.64 Qatari riyals.