As Qatar's standoff with its neighbors enters its fourth week, analysts have warned the crisis may exacerbate Qatari banks' pre-existing liquidity problems and hit their profitability.
Ratings downgrades and further economic isolation loom after five Arab countries accused Qatar of funding terrorism and suspended transport and diplomatic ties with it June 5. In a sign of concern about the banking sector, Qatar's sovereign wealth fund deposited "billions of dollars" in the country's banks to shore up liquidity, according to unconfirmed reports June 19.
"External liabilities of Qatari banks have increased dramatically over the last few years," Mohamed Damak, a credit analyst at S&P Global Ratings, said in an interview.
Qatari banks are already exposed by heavy overseas borrowing to finance state infrastructure and building projects, including up to $10 billion for stadiums to host football's 2022 World Cup, and the government's Qatar Vision 2030, which encompasses $45 billion for new railway projects.
A May 8 S&P Global Ratings report, published less than a month before the blockade was announced, warned that the sharp rise in external debt left Qatar's banks more vulnerable to external shocks.
Foreign liabilities at Qatar's banks were $124 billion in March, up from $85.12 billion at the end of 2015. Nonresident deposits made up 42% of deposits at the end of 2016, from 22% two years before, just as resident deposits have shrunk.
Declining oil, gas revenues
Oil and gas revenues, which comprise half of GDP and 90% of fiscal receipts, have declined, pushing growth down to 2.6%, its lowest in two decades. An important source of resident deposits previously, deposits from government and government-related entities fell to 34.2% of resident deposits in 2016, down from 44.7% in 2013.
"Generally speaking, liquidity has been a problem in Qatar since the oil price collapse of 2014," Economist Intelligence Unit analyst Mohammed Abdelmeguid said. The net foreign asset deficit in Qatar's banking system ballooned from under $5 billion in mid-2014 to nearly $50 billion by the first quarter of 2017, he said.
"What continues to worry me is that the loan-to-deposit ratio is still well above 100%," he added. The ratio, a common measure of liquidity, was 111.6% in Qatar in April, compared to 99.4% in the United Arab Emirates and 87.4% in Saudi Arabia.
Qatar's banks should be able to withstand a withdrawal of Gulf deposits and 25% of other deposits without requiring a government bailout, Damak said in a June 9 S&P Global Ratings report. However, he told S&P Global Market Intelligence: "Several banks would need to use their investment securities portfolio [to unlock their liquidity]," adding a 20% "haircut" on their value seemed "reasonable."
Qatari banks' profitability would suffer from selling investments to make up for deposit withdrawals, as well as from increased borrowing costs from any ratings downgrade. "I would say the immediate risk is a downgrade of the sovereign, followed by a worsened liquidity picture, followed by hits to the banks' profitability," said Damak.
Likelihood of ratings downgrade
Fitch and S&P Global Ratings placed Qatar and its banks on negative rating watch, meaning a 50% likelihood of a downgrade within 90 days. A downgrade "would obviously have an impact" on the banks' funding costs and profits, said Damak.
Other threats to liquidity, say analysts, include the UAE following Saudi Arabia's lead in ordering banks not to process payments in Qatari riyals or to engage in loans, letters of credit, trade facilities or treasury investments with Qatar. "The curbs on dealings with Qatari banks by regional central banks could close off an important channel for raising capital and boosting domestic liquidity," said Abdelmeguid.
Of Qatar's large banks, Qatar National Bank (QPSC), or QNB, is best prepared for the crisis, said Damak, with roughly 5% of liabilities in other Gulf states. QNB's lower cost domestic funding base and higher margins from international operations make it more profitable than its peers, while its largest depositors are lower-risk Qatari government-related entities, Fitch said June 21.
Qatari banks active in Islamic-compliant banking products are most likely to have large numbers of depositors elsewhere in the Gulf.
With approximately 25% of liabilities in Gulf Coordination Council states, Qatar Islamic Bank (QPSC) is most exposed of large banks to outflows. Qatar International Islamic Bank (QSC), Masraf Al Rayan (QPSC) and Barwa Bank face similar difficulties.
"The way the situation has developed in the last week or so has created a lot of uneasiness," said a head of treasury at one Islamic bank, who asked not to be named.
"[W]e think QNB has the strongest credit quality, and then we see [Qatar International Islamic Bank] and Doha Bank QSC [as] comparable, and then Commercial Bank (PSQC) probably weaker than these two," said Damak, noting Commercial Bank has been "cleaning their balance sheet and restructuring some of their exposures and also trying to strengthen their capitalization."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
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