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Moody's lowers outlook on Qatar banking system on weakening operating conditions

Moody's on Aug. 8 lowered the outlook on Qatar's banking system to negative from stable, citing weakening operating conditions and ongoing funding challenges.

The outlook further incorporates the potential weakening capacity of the state to support its banks and reflects the agency's expectation of how bank creditworthiness will evolve in Qatar in the next 12 months to 18 months.

Moody's predicts that Qatar's GDP growth will slow to 2.4% in 2017 from the "exceptionally high rates of around 13.3%" recorded from 2006 to 2014. Domestic credit growth will also decelerate to between 5% and 7% for 2017 and 2018, from 15% in 2015.

Asset quality will drop to a certain extent owing to factors including a gradual economic slowdown as well as an ongoing diplomatic dispute with neighboring Gulf countries, which could lead to some outflows of foreign deposits and other external funding.

Problem loans are expected to rise to about 2.2% of gross loans by 2017, from 1.7% as of December 2016, although even the elevated rate would be among the lowest in the Gulf Cooperation Council region, the agency noted.

However, Moody's said capitalization will remain strong, providing Qatari banks with substantial cushions to absorb losses. Increases in funding and provisioning costs will likely depress returns on assets to around 1.4% in 2017, from 1.6% in 2016, the agency said.