Banks in #Qatar could see more consolidation: Fitch | ZAWYA MENA Edition

Banks in Qatar could see more consolidation: Fitch | ZAWYA MENA Edition

Qatar's crowded banking sector could see more consolidation triggered by pressure on banks' profitability from the coronavirus pandemic, particularly those with weaker franchises and limited pricing power, according to Fitch Ratings.

Common government ownership is also a key driver for consolidation to create better capitalised banks with enhanced competitive advantages to support the Qatar Vision 2030 development plan, the global ratings agency said in a new report. Al Khalij Commercial Bank and Islamic bank Masraf Al Rayan's (MAR) recently agreed merger will potentially create Qatar's largest Islamic bank by total assets and diversify MAR's business model, which is predominantly wholesale focused (85 percent of total financing).

This will be the second merger in Qatar between an Islamic bank and a conventional bank after Islamic bank Dukhan and International Bank of Qatar (IBQ) merged in April 2019. Despite a weaker economic environment and expected downward pressure on valuations from the impact of the pandemic, AKCB was valued at 8.2 billion Qatari riyals (based on the closing share price on 5 January), representing 1.14x its tangible book value, compared with 1.027x tangible book value for IBQ (A/Stable/bb+ pre-merger).

“In our view, this reflects AKCB's adequate capitalisation (end-3Q20: common equity Tier 1 ratio of 14.8 percent against 8.5 percent regulatory minimum) and private banking niche, an important addition to MAR's business model and funding franchise,” Fitch said. MAR (the surviving entity) will have a larger funding capacity (147 billion riyals combined non-equity funding) to finance additional government projects. This could further increase MAR's exposure to government and government-related entities, which represented 47 percent of its financing book at end-3Q20, but would support the bank's asset quality. The combined entity is set to be well-capitalised with a leverage ratio of about 12 percent, although one-off integration costs could weaken capital. The merger should strengthen MAR's private banking funding franchise, which could reduce the bank's high reliance on wholesale funding, particularly short-term placements, and lower its loans-to-deposits ratio, which is one of the highest in the market.