As politicians around the world take steps to curb profits at the biggest lenders, Qatar National Bank SAQ (QNBK) is producing the best risk-adjusted returns by increasing ties with the government, its largest customer.
Shares of the Doha-based lender returned 4.3 percent in the past five years after adjusting for price swings, the top gain among the 50 biggest banks by market capitalization, according to the BLOOMBERG RISKLESS RETURN RANKING. Qatar National Bank, valued at $25 billion, had the highest total return and the third-lowest volatility.
The lender, whose chairman is also the country’s finance minister, has become 50 percent more profitable than global peers by luring deposits from government-backed savers and lending to government-backed borrowers as Qatar spends about $130 billion to prepare for the 2022 soccer World Cup. Political ties are fueling Qatar National Bank’s growth while China and Brazil cut loan margins, U.S. (S5FINL) lawmakers curb trading and European (SX7P) leaders call for a financial-transaction tax.
“It’s probably one of the safest banks,” said Oliver Bell, whose $143 million T. Rowe Price Africa & Middle East Fund (TRAMX) beat 74 percent of peers this year and had its third-biggest holding in Qatar National Bank as of June. “The government effectively gives deposits to this bank and then borrows at the other end and gives the bank a margin.”
Qatar National Bank’s loans to the government and government agencies increased to 65 percent of the total outstanding as of June, from 52 percent in 2010, according to the bank’s website. At the same time, government and agency deposits rose to 56 percent of the total from 41 percent.
The government finances spending and investment through Qatar National Bank, providing the lender with profits, in part because it’s a way to redistribute wealth to local investors who own the shares, said Emad Mostaque, a strategist at Religare Noah in London. Qatari investors, including the nation’s sovereign wealth fund, own about 96 percent of the bank’s stock and foreign ownership is capped at about 12 percent, according to the Qatar Exchange.
Leaders in Qatar, the world’s top exporter of liquefied natural gas, also view the bank as a “national champion” that will help boost the nation’s influence as it expands abroad, Mostaque said in a phone interview.
Qatar National Bank declined to comment, while the Qatar Investment Authority, the nation’s sovereign wealth fund, didn’t respond to an e-mail seeking comment.
Qatar National Bank’s shares have returned 130 percent during the past five years, including dividends, for the top gain among the 50 biggest banks. On a risk-adjusted basis, the advance was more than twice as big as second-ranked Commonwealth Bank of Australia. Qatar National Bank, with total assets of $91 billion, also topped the rankings over three and two years.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The MSCI All-Country World Financials Index (MXWD0FN) has lost 47 percent in the past five years, including dividends, as the 2007-2009 financial crisis fueled record bank losses and prompted tighter regulation of the industry. Allied Irish Banks Plc (ALBK), which had $177 billion of assets at the end of last year, plunged more than 99 percent in Dublin trading to lead declines among the biggest lenders, and New York-based Citigroup Inc. (C), with $1.9 trillion of assets, lost 94 percent. State Bank of India returned 52 percent for the second-biggest total return after Qatar National Bank.
U.S. government agencies are writing rules to restrict how banks use their own money to make trades, while the German government said last month that it will ask the European Commission to introduce a financial transaction tax that’s backed by countries including Italy and France.
Brazilian President Dilma Rousseff has criticized high lending rates, spurring some of the nation’s biggest banks to cut them this year. China’s Premier Wen Jiabao said in April the country needs to end the “monopoly” of a few big lenders. Interest rate reductions by the People’s Bank of China this year have prompted analysts to cut industry profit forecasts.
Agricultural Bank of China Ltd., the country’s third- largest government-controlled lender by market value, retreated 9 percent in Shanghai trading during the past five years even as its shares had the lowest volatility among the biggest banks. State-owned Banco do Brasil SA sank 7.1 percent in Sao Paulo.
Qatar National Bank has produced a return on equity of at least 19 percent during the past five years. Earnings increased as gross domestic product expanded at an average annual rate of 17 percent, the fastest pace among the world’s 70 largest economies, data compiled by Bloomberg and the International Monetary Fund show.
A surge in gas production has propelled economic growth, lifting per-capita GDP in the nation of 1.7 million people to $104,300, the second-highest worldwide behind Liechtenstein, according to the CIA World Factbook.
The government is set to build a $35 billion rail and metro line, a $7.4 billion port, new roads and stadiums to improve the country’s infrastructure and prepare to host the World Cup, the world’s most-watched sporting event.
Increased government spending has fueled demand for financing. Qatar National Bank’s loans climbed 56 percent in the year through June while earnings advanced 17 percent. The lender’s ROE was 20 percent, compared with a 13 percent average for the 50 biggest lenders, data compiled by Bloomberg show.
Qatar National Bank’s tier 1 capital ratio, a measure of its ability to weather loan losses, is 20 percent, the highest level among global peers, data compiled by Bloomberg show. The bank has an Aa3 long-term credit rating at Moody’s Investors Service, the fourth-highest investment grade. That’s eight levels above Allied Irish Banks and one higher than Agricultural Bank of China. Commonwealth Bank of Australia (CBA) is rated one level above Qatar National Bank at Aa2.
The Qatar Investment Authority, which has assets of more than $100 billion, owns a 50 percent stake in the lender, data compiled by Bloomberg show. Qatar National Bank Chairman Yousef Hussain Kamal has been the nation’s finance minister for more than a decade, according to the ministry’s website.
“Both sides of Qatar National Bank’s balance sheet have benefited from the surge in the state of Qatar’s wealth,” said Akber Khan, an asset-management director at Al Rayan Investment in Doha.
The shares may advance 31 percent during the next 12 months, according to the average of five analysts’ share-price estimates compiled by Bloomberg.
Slowing economic growth is a “downside risk” for Qatar National Bank, Goldman Sachs Group Inc. wrote in a July 5 research note. The nation’s GDP growth will probably drop to 6 percent this year from almost 19 percent in 2011 as energy industry’s expansion cools, according to April forecasts by the IMF. That’s still faster than the Washington-based fund’s 3.5 percent growth estimate for the global economy.
The expansion in Qatar is vulnerable to falling prices for its liquefied natural gas exports. Prices for the fuel in northeast Asia declined this month to the lowest level in a year, according to World Gas Intelligence.
Qatar National Bank shares are valued at 11 times reported earnings, compared with an average of 8.6 times for the biggest lenders worldwide, according to data compiled by Bloomberg.
“Any higher premium will need more momentum in terms of growth,” said Fadi Al Said, a Dubai-based senior investment manager at ING Investment Management.
The lender plans to boost earnings by expanding its international business, which accounts for about 10 percent of all loans.
Qatar National Bank said in an investor presentation this month that pursuing “sizeable acquisitions” and building its business across the Middle East and Africa is a priority. It considered an acquisition of Turkey’s Denizbank AS (DENIZ) in April, according to three people familiar with the situation, before that bank was bought by Moscow-based OAO Sberbank.
“The government wants it to become one of the biggest banks in the world,” said Religare Noah’s Mostaque, who estimates Qatar National Bank may boost earnings at a 20 percent pace during the next decade and advised investors to increase holdings on July 7. “It’s part of the international strategy to increase Qatar’s influence.”