Commercial banks in Qatar will see their profitability fall under continued pressure in the coming years as deposit growth slows and interest rates drop, new research shows.
A report by BMI Research, part of Fitch Group, states: “In the first 10 months of 2016, the average interest rate on government securities stood at 2.65 percent, well below the average of 5.96 percent that banks demand on private sector loans.
“With the public sector continuing to drive demand for loans, lending rates will remain under pressure. We expect profitability to remain under pressure over the coming years.”
The report noted that the average rate on time and savings deposits has gradually increased because of the need to attract deposits while liquidity is squeezed in a low oil price environment. This has resulted in a fall in the net interest margin, it added.
BMI said the anticipated tightening of monetary policy – Qatar Commercial Bank (QCB), for example, is expected to follow the US Federal Reserve in its hiking cycle – would provide some “welcome breathing space” to commercial banks. But this will be “no panacea for profitability”, it warned.
However, overall demand for loans will remain strong despite the weaker macroeconomic environment, driven by the government’s need for financing in the run-up to the Qatar 2022 FIFA World Cup.
This will allow commercial banks to grow their asset bases by an average of 12.5 percent year-on-year over 2017-2020, according to BMI.
This is a slight slowdown from 14.3 percent year-on-year over 2011-2015, it said, but still represents significant opportunities and will mean Qatar commercial banks are likely to remain more resilient to the low oil price environment than their peers elsewhere in the GCC.
Still, the growing importance of the public sector in total demand for credit, combined with the ongoing liquidity squeeze and the low interest rate environment “will continue to weigh on profitability”, the report said.