Qatar's Banking Sector To Witness Positive Momentum In 2025

(MENAFN- The Peninsula) Joel Johnson | The Peninsula

DOHA: The Qatari banks are expected to be profitable and benefit from strong capitalisation and adequate liquidity, revealed S&P Global ratings in its latest report. Researchers state that this trend will continue with an“only modest drop” in net interest margins owing to interest rate cuts.

The system's external debt is nearly one-third of domestic credit, however, the completion of numerous infrastructure projects will result in lower funding needs.

On the other hand, the Qatari government's commitment and stance toward its banking industry mitigates the risk of external debt outflows if geopolitical risk escalates.

It said,“Geopolitical tensions in the Middle East are high but we currently do not expect a full-scale regional conflict, and we anticipate macroeconomic conditions in Qatar will remain broadly stable.”

Meanwhile, the significant upsurge in the country's liquefied natural gas (LNG) production and its spillover effect on the non-hydrocarbon economy is anticipated to bolster credit growth in the years, said market experts.

However, a return to normal non-hydrocarbon economic activity remains relatively flat LNG production in the current year, and completion of many capital projects implies lower requirements for credit as the data indicates a slower domestic credit growth in Qatar of almost 5 percent in 2025-2026 versus 11 percent average in 2019-2022.

The data also forecasts that Qatar's North Field Expansion project will increase LNG production by nearly 35 percent by 2027 and expect a positive momentum in growth to temporarily average 5.8 percent in 2026-2027 as compared with an average 2 percent growth in 2024-2025.

“We anticipate local funding sources will increasingly fund credit growth on the back of slower public sector deleveraging,” it said.

The report states that the system's leverage is accelerated and almost 40 percent of total domestic credit is in the high-risk and cyclical real estate and related services.

Additionally, continued pressure on real estate prices could augment the migration of stage 2 loans to nonperforming loans (NPLs) at some midsize banks, while public-sector initiatives and interest rate cuts will help prevent a more severe deterioration in asset quality.

It said:“NPLs will remain modestly elevated at about 4 percent in 2025 before dropping in 2026 when we expect GDP and lending opportunities to pick up amid the LNG expansion, but oversupply in the real estate and hospitality sectors will weigh on banks' asset quality.”

Analysts noted that asset quality should stabilize due to interest rate cuts, and the government's tourism and non-oil diversification push.

Federal Reserve is anticipated to cut the rates by 175 basis points (bps) by the year-end, including the 100bps already delivered last year. Given the riyal's peg to the US Dollar, Qatar Central Bank (QCB) will likely mirror these cuts.

Experts highlight that the banks' profitability will decline due to the lower interest rates and the replacement of external funding by more expensive local funding sources. The cost of risk is expected to trend down due to the supportive economic environment and lower rates.

On the other hand, Qatari banks are well-capitalized. The total capital ratio and Tier 1 ratio, including capital conservation buffer for the whole banking system, remain well above QCB's minimum requirements of 12.5 percent and 10.5 percent, respectively.

Supportive shareholders, dividend payouts that tend to be below 50 percent, and strong profitability are expected to contribute to stable capitalisation levels.

Qatar has implemented several infrastructure projects over the years, softening the need for external funding. Sources say that the country needs more local investors to fund credit expansion in 2025-2026.

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