Qatar’s decision to restrict Islamic banking and introduce limits on consumer borrowing may reduce profit by as much as 22 percent for banks in the world’s fastest-growing economy.
Net income estimates for Commercial Bank of Qatar QSC, the nation’s second-largest bank, were cut 22 percent, or 478 million riyals ($131 million) on the rule changes by analysts at Credit Suisse Group AG (CSGN) last month. They also cut their estimates for Doha Bank QSC (DHBK), the fourth-biggest lender, by 10 percent, according to a report to clients. Qatar National Bank SAQ (QNBK), the country’s biggest lender by assets, will be hurt by slower loan growth and a disruption to its strategy from the decision, Nomura International Plc analysts said last month.
The central bank in February told all conventional lenders to wind down their Islamic banking divisions and to stop taking Islamic deposits immediately on concern they may be using funds from the conventional bank for Islamic loans. The regulator last month also reduced the amount banks can lend to Qataris to 2 million riyals from 2.5 million and to foreigners to 400,000 riyals and limited the interest lenders can charge on the loans to 1.5 percentage points over the bank rate, at 5 percent today.
“The impact is negative for the conventional banks, although the opportunities are very large for Islamic finance,” said Jaap Meijer, head of the bank team at Dubai-based Alembic HC Securities. “If you leave banks on their own, they start to be short-term oriented and be quite reckless with their lending and that is what the Qatar central bank wants to prevent.”
Islamic banks are required to follow Muslim Shariah rules, which ban the payment and receipt of interest as well as investments in industries like alcohol and gambling. Islamic lenders pay a profit instead of interest, and their loans are backed by assets that may include an agreement where the bank and the borrower agree on the cost and a profit margin.
Qatar, the world’s biggest exporter of liquefied natural gas, predicts the economy will expand by 15.7 percent this year, helped by fuel exports, according to the General Secretariat for Development Planning. Growth will ease to 7.1 percent in 2012 and to 4 percent by 2013 as early investment for the 2022 World Cup fails to replace falling energy investment.
The central bank imposed the regulations because there was a risk that conventional deposits would be used for Islamic lending, Raghavan Seetharaman, chief executive officer of Doha Bank, said in an interview. There was “systemic risk to them both,” and therefore a need to separate them, he said.
Spokesmen for Qatar National Bank and Commercial Bank of Qatar (CBQK) declined to comment on the rules.
Because the changes “have negative implications on growth, we think the time has come to turn less positive on the sector,” Mohamad Hawa, an analyst at Credit Suisse Group AG, said in a research report last month. The bank reduced its target price of Commercial Bank of Qatar by 20 percent and of Doha Bank by 16 percent and cut its rating to neutral.
Islamic loans accounts for 20 percent of Qatar National Bank’s lending, 11 percent of Doha Bank’s and 8 percent of Commercial Bank of Qatar’s, according to an Alembic HC report. Alembic said it expects Qatar National Bank to wind down its Islamic banking and Commercial Bank to sell it loans. Qatar Islamic Bank (QIBK) SAQ, the country’s biggest Islamic bank, is likely to benefit because it may be able to increase its 29 percent share of the market for Islamic loans in Qatar, Alembic said.
Qatar has seven conventional banks, which pay and receive interest on deposits and loans, four Islamic lenders, which don’t, and seven foreign institutions operating in the country, including the HSBC unit that is scheduled to close. Domestic bank credit grew at more than a 40 percent annual rate from 2006 to 2008, then slowed to 14.1 percent in 2009 and 16.7 percent in 2010, government data show.
For conventional banks, the impact on earnings of winding down their Islamic banking divisions will be “slim to none,” Ryan Ayache, a Dubai-based analyst at Deutsche Bank AG (DBK) said. People confused the growth of the last two years as coming from Islamic banking while it actually came and continues to come from the government, Ayache said.
Qatar has the world’s fastest-growing economy and the highest per-capita gross domestic product, according to the CIA World Factbook, and a population of about 1.7 million. Along with the United Arab Emirates, Qatar hasn’t experienced the anti-government protests that spread elsewhere in the region.
‘Gap Is Closed’
“Islamic banking used to be more profitable, not anymore,” said Doha Bank’s Seetharaman. “Banks would earn a 4 percent margin on Islamic loans and a 3 percent to 3.25 percent margin on conventional lending,” he said. “Now the gap is closed” because of new competition in Islamic banking, he said.
Qatar isn’t the only country in the region to have framed new rules on consumer lending. The U.A.E. announced regulations earlier this year that came into effect May 1 to curb excessive bank lending and cap some service fees. It didn’t restrict Islamic lending by conventional banks.
The U.A.E. capped personal loans at 20 times a borrower’s monthly salary and its repayment period to 48 months, while overall instalments for all loans, including personal, car, housing and credit cards, must not exceed 50 percent of a borrowers’ gross salary and any regular income.
Raj Madha, a Dubai-based analyst at Rasmala Investment Bank Ltd., said he scaled down his forecast of consumer loan growth in Qatar this year to about 5 percent from 8 percent to 10 percent earlier after the new lending rules.
Qatari banks earned up to 9 percent interest on retail loans, which is now capped at 6.5 percent, Hawa at Credit Suisse estimated. A percentage point decline in yield on consumer loans will erode Qatar National’s profit by 2.5 percent, Commercial Bank’s by 4.3 percent and Doha Bank’s by 8.4 percent, he said.
The rules so far haven’t hurt banks’ profits. Qatar National reported a 35 percent jump in first-quarter profit to 1.7 billion riyals, Commercial Bank had a 9 percent rise to 446 million riyals and Doha Bank said profit grew 15 percent to 363 million riyals.
Qatar National’s shares have risen 6 percent since the regulator’s decision in broke in February. Commercial Bank has dropped 15 percent and Doha Bank has shed 15 percent.
“People are getting nervous” because the rules are designed to promote stability rather than growth, said Ayache at Deutsche Bank. “Why is there a need for more stability in the banking sector that is not known to be unstable?”
To contact the editor responsible for this story: Edward Evans at Eevans3@bloomberg.net