(MENAFN- Gulf Times) For a 1% increase in interest rates, Qatar's banking sector's net interest income (NII) was found to decline by QR4.1bn at an aggregate level, according to the country's banking regulator.
'For a 100 bps (basis points) increase in interest rates, at the aggregate level, NII of banks was found to decline by QR4.1bn, Qatar Central Bank (QCB) said in its financial stability report 2017.
Nonetheless, given the high loan-to-deposit ratio and the banking sector's requirements to improve the share of 'stable resources in its funding mix, banks might incentivise customers to improve their deposit base in the long run, it said, adding this, in turn, might squeeze the interest spread, with an associated impact on profitability.
Since banks have surplus funds at shorter end of the maturity ladder, 'an increase in interest rate is expected to have a negative impact on profitability due to faster re-pricing of liabilities as compared to assets in case of a parallel shift adopted by the banks, it said.
However, the banking sector appears to have suitability adjusted their interest rate so as to improve their spread and accordingly profitability, it added.
Given the fixed parity between the Qatari riyal and the US dollar, QCB's short-term interest rates policies mostly followed the policy actions by US Fed Reserve. Although the Fed raised the interest three times during the year (a total increase of 75 basis points) QCB hiked its deposit rate only twice (a total of 50 bps) in 2017.
'The increase in interest rate by QCB had impacted both deposits as well as credit rate of interest. Rate of deposit increased across the maturity bucket, the report said.
The rate for medium term maturity (six months and one year) increased by around 65 bps to 69 bps during the year, while rate for above one year maturity increased only marginally. In case of credit, the increase in rate of interest was in the range of 42 bps to 81 bps, where the long term maturity bucket (above three years) increased at a lower rate. At the same time, one-year maturity increased at the highest rate.
Re-pricing of deposit and credit resulted in higher average cost of deposit by 27 bps, while average return on credit increased by 35 bps. Accordingly, the interest spread increased in the current year higher as compared to a decline in the previous year, according to the QCB.
During 2015, the average spread was 2.72% (as cost of deposit was 1.07% and return on credit was 3.79%), which then fell to 2.27% (1.51% and 3.78%) during 2016 but only to increase marginally to 2.35% (1.78% and 4.13%) during 2017.
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