Monday, November 27, 2017

What is the Qatari Banking Sector’s Foreign Currency Exposure? Part 4 – Consolidated Annual Financial Reports “Approach” Continued

AA Puts the Finishing Touches on His Analysis
Earlier posts here, herehere, and here.

With all the caveats in the preceding post, let’s look at a series of charts which I’ve compiled from the FYE 2016 annual reports for 7 Qatari banks.  Recall there are 3 banks (AlAhli, AlKhaliji, and IBQ that don’t provide full geographical analysis of assets and liabilities) and one bank Development Bank of Qatar that has a relatively miniscule positive NFA position and so I’m not inclined to spend time analyzing it.
Before we begin, one important note.  I will be comparing consolidated data as of 31 December 2016 to QCB data as of that same date in what follows  Keep in mind that since 31 December 2016, QCB data shows a QAR 79 billion reduction in TFL (USD 21.7 billion), and a QAR 41 billion (USD 11 billion) reduction in NFA.  For a net decrease in the negative NFA position from USD 47.7 billion to USD 36.6 billion equivalent.
Qatar Banks NFA 31 Dec 16
Consolidated Financials  - QAR Billions
BANKS
TFA
TFL
NFA
NFA-USD
QNB
278
355
-77
-$21
QIB
25
37
-12
-$3
CBQ
43
53
-10
-$3
MAR
16
13
3
$1
DOHA
10
9
1
$0
BAR
11
5
6
$2
QIIB
2
6
-4
-$1
TOTAL
386
478
-92
-$25

  1. MAR = Masraf al Rayan and BAR = Barwa Bank. 
  2. As per the QCB’s statistics, the NFA position was a negative USD 47.7 billion equivalent at 31 December 2016.  Using consolidated financials, the NFA position was negative USD 25 billion at that same date.  While this is based on a sample instead of the population, it’s unlikely that the remaining banks have a negative net foreign position anywhere approaching USD 23 billion.  As per QCB data, the QDB has a miniscule though positive NFA exposure equivalent to some USD 84 million.  Because total liabilities (foreign and domestic) of the first three banks equal QAR 112 billion (some USD 31 billion). It’s highly unlikely that they have foreign liabilities equal to 74% of total liabilities.  And also if they have such FL, they probably have some amount of FA to offset them. 
  3. On that basis and subject to the caveat about the free transfer of assets between overseas entities and Qatar, particularly for subsidiaries, it certainly looks like the Qatar banks aggregate position (onshore and offshore) is even more manageable. 
  4. One can also look at other measures of this exposure. If we look only at banks with negative NFA, they owe some QAR 102 billion (USD 28 billion). 
  5. If we look at a base worst case (because we lack data on three banks), consolidated financial derived TFL are QAR 478 billion (USD 131 billion) which is higher than QCB’s TFL of QAR 447 billion (USD 123 billion). 
But what is the exposure to Other GCC countries, which would include the GCC 3?
Qatar Banks NFA  31 Dec 16
With Other GCC States
Consolidated Financials - QAR Billions
BANKS
TFA
TFL
NFA
NFA-USD
QNB
32
24
8
$2
QIB
9
28
-19
-$5
CBQ
10
14
-4
-$1
MAR
3
7
-4
-$1
DOHA
10
9
1
$0
BAR
5
2
4
$1
QIIB
1
5
-4
-$1
TOTAL
71
89
-18
-$5

  1. NFA exposure to Other GCC is QAR 18 billion (USD 4.9 billion). But note that not all banks have negative NFA positions. 
  2. As argued more than once in earlier posts, it’s more proper to look only at those banks with negative NFA positions.  In that case, the exposure is QAR 31 billion or USD 8.5 billion.  Still manageable. 
  3. The total TFL to Other GCC (some QAR 89 billion equivalent to USD 24.5 billion) is only 19% of the QAR 478 billion in TFL. 
  4. The GOQ shouldn’t have a problem providing either of these amounts and by some reports has already transferred this amount to Qatari banks. 
  5. The above is based on a sample of 7 banks because the remaining banks—AlAhli, AlKhaliji, IBQ and DBQ—don’t provide the sufficient information to include them. While we are missing detailed data for four banks, it’s unlikely that their positions will dramatically change these amounts. 
  6. AlKhaliji has disclosed subsidiaries with gross assets of QAR 8.9 billion (USD 2.4 billion) primarily AlKhaliji France (AKF) which appears to operate primarily through its branches in the UAE. On the asset side AlKhaliji reports some QAR 9.9 billion in assets with OGCC.  We don’t know the total FL to OGCC. AlKhaliji shows FX assets of some QAR 3.5 billion and FX liabilities of QAR 3.3 billion in its currency risk note. 
  7. AlAhli and IBQ do not appear to have foreign branches or operating subsidiaries overseas. IBQ reports some QAR 1.4 billion in OGCC FA and a negative net FX position of QAR 4.4 billion in AED in the banking book so a quesstimate of their FL position vis-à-vis the OGCC is some QAR 5.8 billion.  That assumes no significant non AED funding from the OGCC. 
  8. AlAhli reports some QAR 1.1 billion in FA with OGCC.  It does not report any significant FX position in AED.  Again assuming no significant non AED funding from OGCC a good guesstimate is that OGCC FL are QAR 1.4 billion.   
  9. Qatar Development Bank, the missing fourth bank, doesn’t release financials but from the QCB data we can see that it is funded primarily with equity and has a positive NFA of some USD 84 million equivalent.
  10. If we adjust the base worst case scenario for the above QAR 17.1 billion in estimated FL in the worst case increases by USD 4.7 billion equivalent to USD 29.2 billion.  Reasonable increases in the QAR 17.1 billion amount (say in the range of 2 -4) would still leave the base worst case at a comfortable level. 
  11. Other GCC includes Kuwait and Oman. These states may be less “enthusiastic” about withdrawing their funding from Qatar.  That being said, Oman and Kuwait are unlikely to have as large positions with Qatar as the GCC 3. 
  12. What this means is that for the GCC 3+1’s efforts to be successful they will need to persuade other foreign creditors and depositors to withdraw funds from Qatar.  That seems a difficult row to hoe. 
But there are some strains on the individual bank level.   For example, QIB has OGCC-related TFL (QAR 28 billion) greater than QNB (QAR 24 billion) a bank which is roughly 5 times its size. 
Qatar Banks NFA 31 Dec 16
Other GCC FA & FL to TFA & TFL
BANKS
GFA/TFA
GFL/TFL
QNB
12%
7%
QIB
38%
76%
CBQ
23%
27%
MAR
20%
52%
DOHA
94%
95%
BAR
49%
32%
QIIB
36%
71%
TOTAL
18%
18%

  1. Looking solely at foreign assets and foreign funding, four banks have ratios that cause concern:  QIB, QIIB, MAR, and Doha, though on an absolute basis the GOQ could easily provide replacement funding.
  2. Note the potential exposure of QIB, Doha, Barwa and QIIB to asset concentrations in Other GCC states.  If the boycott continues, this business may be “lost”.  If the GCC 3 takes steps to restrict these banks’ access to their assets in these countries, including the proceeds of the realization of those assets, by way of additional boycott steps, then much larger but still manageable GOQ support would be required. 
  3. QNB on the other hand is relatively well positioned. 
But this chart measures OGCC FA and FL in terms of total FA and FL.  That tells us how important OGCC business is to their foreign activities.  But what about the importance to their total business both foreign and domestic?
Qatar Banks NFA Position 31 Dec 16
Other GCC FA and FL to TA & TL
BANKS
TA
TL
OGCC/TA
OGCC/TL
QNB
720
621
4%
4%
QIB
140
120
7%
24%
CBQ
130
130
8%
11%
MAR
92
79
4%
9%
DOHA
90
77
11%
11%
BAR
46
39
12%
4%
QIIB
43
36
2%
12%
TOTAL
1,260
1,102
6%
8%

  1. QIB again “sticks” out.  Looking at details in their FYE 2016 annual report, their liability concentration in Other GCC is driven by customer deposits.  80% of QIB’s QAR 28 billion in Other GCC liabilities is from “equity of unrestricted account holders”.  There isn’t a breakdown by maturity of QIB’s TFL.  If we assume these track its other customer deposits of this nature, we can use the maturity note on page 39 of their FYE 2016 report.  According to that note, some 70% of EUAH mature within 3 months with an additional 14% between 3 and 6 months.  Assuming these maturity patterns have carried forward, then QIB could be facing some serious withdrawals. 
At this point I’ve thrown a lot of data at you.  It’s time to organize that data into key takeaways and to provide some scenario analysis of the exposure of Qatari banks to foreign liabilities and as well of the exposure of Qatar’s Central Bank to that exposure if the banks are incapable of dealing with it themselves.   That will be the topic of a future post. 

What is the Qatari Banking Sector’s Foreign Currency Exposure? Part 3 – Consolidated Annual Financial Reports “Approach”

Just the Kit to Go Deeper and Deeper 

CONSOLIDATED FINANCIAL REPORTS APPROACH
Earlier posts herehere, and here. 
As mentioned in the previous post, while we can use Qatar Central Bank reported data to get a more comprehensive understanding of Qatari banks’ net foreign asset (NFA) exposure than that contained in the QCB’s single NFA “number”, we still need more granular information. 
  1. An allocation of the banking sector’s risk by geographical region to identify potential concentrations of exposure.  In this case, are FA and FL primarily to other GCC states? Or states likely to be influenced by them? 
  2. A disaggregation of that data into FA and FL position of individual Qatari banks. As argued earlier, we should be primarily focused on those banks with negative NFA positions, unless we assume that those banks with positive NFA positions will make their foreign assets available to banks with negative position.  As well to properly assess FA exposure, we need to know if a bank with overall positive NFA has negative NFA with other GCC states.  
We can use the geographic allocation of assets and liabilities provided in the risk management notes in the consolidated financial statements of individual Qatari banks to get closer to an answer, but admittedly this is an imperfect exercise.  
  1. Banks only provide this information as of fiscal year end so it quickly becomes stale. Basel Pillar 3 disclosures would provide an additional data point as of June.  But Qatari banks do not publish Basel Pillar 3 disclosures. Presumably the QCB does not require them for some no doubt excellent reason, though AA presently cannot imagine what on earth that might be.
  2. More importantly, consolidated financials include the assets and liabilities of subsidiaries and thus overstate the strictly legal exposure of a bank.  It’s important to note that consolidated financials are an accounting construct not a legal entity. Subsidiaries are treated as though they are directly part of a fictional consolidated “entity” that has direct ownership rights in the subsidiaries’ assets and is directly liable for the subsidiaries’ liabilities.  That’s not the case. The only legal entities are the parent and its subsidiaries.  There is no legal consolidated entity.
  3. The parent of a consolidated entity owns shares in its subsidiaries. Therefore, because it is an equity holder, its rights in its subsidiaries assets are subordinate to creditors of those subsidiaries. There are also almost certainly additional legal or other restrictions on the parent’s right to access its subsidiaries’ assets.  Likewise the parent is not responsible for the subsidiaries’ debts, unless it has provided a guarantee. 
  4. So if we use consolidated financial data we are including FA that are not available to the parent as well as FL which are not the obligations of the parent. 
  5. On the other hand banking groups have an incentive to maintain their subsidiaries’ health not only to protect their equity investment but also their reputation. Distress at a subsidiary may be taken as a sign of poor controls, financial distress at the parent, etc. and lead to creditors rethinking their relationship with the parent.  And while FA are not legally available to the parent, it is possible that a subsidiary could place a deposit with its parent instead of with another bank.  Transactions of this nature would be legally constrained by legal lending limits, particularly those to related parties.  
  6. On a positive note, consolidated financials provide another way to look at the NFA position of individual banks. 
Ideally to avoid the issues with use of consolidated financials, we would use parent-only financials.  However, not much more than balance sheets and income statements for the parent-only are provided.  There are no comparable risk management disclosures. 
So what is to be done?
Let’s look a bit closer at the consolidated process.  When a consolidated statement is prepared, the assets and liabilities of the subsidiary are added to that of the parent category by category after eliminating any transactions between parent and subsidiary. Note the latter are included in the parent-only and subsidiary-only financial statements.
As well, the carrying amount of the investment on the parent-only balance sheet is eliminated, based on the accounting concept that the difference between the subsidiary’s assets and liabilities equals its total equity, i.e., paid in capital, surplus, reserves, and retained earnings. 
Where the subsidiary publishes its own standalone financials, information in those financials coupled with information in the parent’s financials can be used to estimate the consolidating entries and back them out.  That information can also help in adjusting the geographical allocation of assets in the risk management note.  That’s important when we want to get a more accurate picture of the parent’s exposure to regions on a gross basis, i.e., FA and FL not just the NFA position. 
Why is that? 
Because the carrying value of the equity in the foreign subsidiary on the parent-only balance sheet is carried at a value that is probably close to the difference between the assets and liabilities of the subsidiary included in the consolidated financials.  Differences could result from income reflected in the subsidiary’s books but not reflected in the parent’s (parent-only) financials.   
As the above discussion indicates, de-consolidation can be a rather extensive process made even more difficult by the absence of information.  Also AA is not inclined to undertake this exercise, if it is of limited use.
To that point, the central goal of this analysis is to determine if the banks and/or the GOC have the resources to successfully “handle” their NFA positions.  For that we don’t need the exact NFA position, but an approximation.  For example, if the NFA position is equivalent to negative US 1 trillion or so, we really don’t need more precision to come to the conclusion that the GOC is unlikely to be able to handle the position.  If on the other hand it’s negative USD 100 billion, we can be reasonably certain the GOC has sufficient resources to support its banks, though this amount might impose some financial strain.  
As a first step in this “exercise”, let’s determine if the differences between Qatari banks’ consolidated and parent-only financials are significant enough to warrant at attempt to de-consolidate.  The chart below compares each bank’s consolidated financials to its parent-only financials.  Sadly, the banks whose names in red boldface do not provide a full geographical analysis of assets and liabilities which makes it frustrates compiling an accurate picture of their individual FA and FL as well as the overall total.
Total Assets of Qatar Banks 31 Dec 2016
Billions of QAR or USD
Banks
Consolid
Parent
Diff
USD
QNB
720
588
132
$36
QIB
140
135
5
$1
CBQ
130
115
16
$4
MAR
92
86
6
$2
DOHA
90
90
0
$0
AL KHALIJI
61
55
6
$2
BARWA
46
46
0
$0
QIIB
43
43
0
$0
AL AHLI
38
38
0
$0
IBQ
36
36
0
$0
TOTAL
1,395
1,231
164
$45

Total Liabilities of Qatar Banks 31 Dec 2016
Billions of QAR or USD
Banks
Consolid
Parent
Diff
USD
QNB
649
513
136
$37
QIB
120
116
4
$1
CBQ
111
95
16
$5
MAR
79
73
5
$1
DOHA
77
77
0
$0
AL KHALIJI
54
48
6
$2
BARWA
39
39
0
$0
QIIB
36
36
0
$0
AL AHLI
33
33
0
$0
IBQ
31
31
0
$0
TOTAL
1,228
1,061
167
$46

  1. For 8 of the banks above, there are no differences between consolidated and parent-only financials (5 banks) and relatively minimal differences for 3 banks, suggesting that we can use their geographical allocation of assets and liabilities are a close approximation to their parent-only financials. In aggregate the difference is equivalent to some USD 4.7 billion.
  2. Two banks—CBQ and QNB—require a further look.  And look we will a bit later. 
But first before we dive deeper into the analysis, let’s compare QCB data as of the 31 December 2016 QSR  (Tables 22 and 23) to aggregate parent-only data compiled from individual bank FYE audited financial reports by OCD AA. 
Why?  To see how close the two numbers are. 
Do the parent-only financials suggest there are additional liabilities or assets, including FA and FL that are not included in the QCB NFA statistic? 
In presenting its data QCB provides separate aggregates for Traditional Banks, Islamic Banks, and Specialist Banks (QDB).  That makes analysis easier and we can spot if there are anomalies by bank type. Since QDB does not publish financials and is a سمكة صغيرة  I'm not including them in the analysis.  Of course, differences are to be expected.  The QCB would likely take a more conservative view of the value of intangibles, unrealized earnings from subsidiaries, etc.  The charts below summarize what we see.
Qatar Banking Sector Total Assets
QAR Billions

Parent
QCB
Diff
Traditional
921
899
22
Islamic
309
323
-14
Total
1,231
1,222
9
Qatar Banking Sector Total Assets
QAR Billions

Consol
QCB
Diff
Traditional
1,075
899
176
Islamic
320
323
-3
Total
1,395
1,222
173

  1. The difference between QCB and the AA-compiled parent-only data arises primarily from differences in loans.  QCB shows QAR 12 billion more in loans for Islamic banks and QAR billion 13 less in loans for Traditional Banks compared to the data I compiled. Note this also reflects adjustments by AA for apparent differences in definitions of asset and liability categories by QCB and the individual bank’s financial reports.  For example, with Traditional Banks, the QAR 14 billion in the net of DFBs and Financing Assets. 
  2. If you decide to pursue the interesting exercise of comparing the two sets of data in detail, a few pointers.  First, as noted above, QCB appears to have definitions of DTB, DFB, and Financing Assets that differ from those used in the individual bank financials so you will see for example, differences in DTB category and loans which AA netted.  Second, there are some QAR 24 billion of debt qualifying as Tier 1 capital that QCB reflects as “debt” in its statistics while the individual parent-only financials reflect these amounts in equity. 
  3. In any case we seem to be within a range that suggests that there are not material differences between the total assets in the QCB data and the parent-only financial report compiled data, and thus presumably in FA and FL. 
  4. Clearly, there are material differences between the consolidated data and QCB’s due to QNB and CBQ as discussed above. 
Let’s take a deeper look at the data derived from consolidated financials and see if we can narrow the difference.  As noted above, two banks are responsible for the difference: CBQ and QNB.
CBQ’s Turkish subsidiary Alternatifbank (“ABank”) accounts for the difference between its consolidated and parent-only financials. ABank’s 2016 TA were some USD 5 billion equivalent and TL USD 4.6 billion equivalent.  ABank’s 2016 IFRS financials have a credit risk note (page 29) that provides a geographical allocation of assets: some 99% are domestic.  Absent similar disclosure on liabilities, we’re left in guestimate territory.  No useful detail on customer deposits or DTBs.  There is some USD 1.6 billion in syndicated loans, sub-ordinated debt (CBQ holds some USD 125 million) and “other borrowings” all to unspecified foreign investors. 
What about QNB?  Here the gap between parent-only and consolidated financials is some QAR 132 billion equivalent to USD 36 billion. Thus, sharpening our focus on the NFA position of Qatari banks is largely a one bank “issue” – QNB. 
I’d expect that QNB’s subsidiaries in Turkey, Egypt, and Indonesia are largely funded in country in local currency to support in-country lending and investing activities.
If that assumption is correct, that means a good portion of the “increased” consolidated assets are offset by “increased” consolidated liabilities in the same currency and obtained from banks and depositors in the country of operation.
Further analysis of QNB’s subsidiaries (Turkey, Egypt, Indonesia, Tunisia, etc.) could allow us to get closer to a “parent” only allocation of FA and FL.  As you might expect, since AA doesn’t like to rely on learned assumptions even his own despite a fervently imagined sterling track record, AA took a look at the 2016 financials for QNB Al Ahli Egypt (USD 10 billion), QNB Finansbank (USD 29 billion equivalent in assets), and QNB Indonesia (USD 1.8 billion) assuming these are the larger fish in QNB’s subsidiary pool.   Sadly, there are no cross-border geographical allocation notes of any use in their financials. 
Looking at QNB Al Ahli’s 2016 annual report it seems assets are primarily in Egypt. On the liability side, cross-border liabilities appear modest, Due to Foreign Banks (DTFBs) equals USD 45 million equivalent just around 47 bp (.0047) of Total Liabilities. 83% of these DTFBs are owed to QNB Qatar.  The only other foreign liability is a EGY 3.9 billion (USD 218 million) loan from the EBRD representing 2.31% of TL.  
Similarly QNB Finansbank states that its business is primarily in Turkey with negligible business in Bahrain.  That’s borne out by a May 2017 drawdown prospectus for its MTN program which shows that foreign loans are not even 0.005 of total loans.    Looking at liabilities (TL = USD 26.2 billion equivalent) there’s no breakdown on DTBs USD 3.3 billion equivalent (12.8% of TL).  Of some USD 1.8 billion equivalent in Debt Securities Issued roughly USD 1 billion are Eurobonds.  Of other borrowings of USD 4.1 billion some USD0.6 billion was provided by QNB.  
QNB Indonesia really didn’t say much.  Or if they did, I missed it.
But note this is not conclusive.  References to “business” focus on the asset side of the balance sheet.  Here we’re also very concerned with cross-border funding.  
Turning back to QNB Qatar’s 2016 financials, note 40 describes the 2016 acquisition of Finansbank disclosing that TA acquired were QAR 120 billion and TL assumed QAR 109 billion.  If you look at Note 35 on geographical allocation of assets and liabilities in QNB’s FYE 2016 annual report, you see that these amounts primarily explain the change from FYE 2015 to FYE 2016 in the “Europe” (!) region.  (CBQ reflects its Turkish subsidiary under Other MENA.)  The aptly named “Other” region probably contains Egypt and Indonesia and no doubt Syria, Iraq, and other subsidiaries. 
What this suggests at least to AA is that we can refine the geographical allocation quite easily by subtracting the TA and TL of each of these three banks from their respective “regional” allocations.  This then gives us a “close enough” geographical allocation to enable us to make a judgment on parent-only geographical exposure. 
Is the number 100% accurate?  No, but as argued above it doesn’t need to be. 
What we also have at the end of this “exercise” are two sets of NFA.  One consolidated and one estimated parent-only that will enable us to construct various NFA scenarios.  NP Let’s look at the results of that analysis, starting with the unadjusted consolidated financials.
QNB NFA by Region 31 Dec 2016
Consolidated Financials
Billions of QAR
REGION
FA
FL
NFA
OGCC
32.3
24.1
8.2
EUR
149.5
224.9
(75.4)
NorAm
12.3
3.8
8.5
Other
83.8
102.5
(18.7)
TOTAL
277.9
355.3
(77.4)
Qatar
418.7
265.8
152.9
TOTAL
696.6
621.1
75.5

Now the adjusted financials.
QNB NFA by Region 31 Dec 2016
Consolidated Financials
Ex- Turkey, Egypt, and Indonesia
Billions of QAR
REGION
FA
FL
NFA
OGCC
32.3
24.1
8.2
EUR
40.5
115.9
(75.4)
NorAm
12.3
3.8
8.5
Other
43.6
62.5
(18.9)
TOTAL
128.7
206.3
(77.6)
Qatar
418.7
265.8
152.9
TOTAL
547.4
472.1
75.3

  1. You’ll immediately notice that the NFA did not change significantly.  That’s because the adjusting entries of FA and FL are equal. I removed the TA of the subsidiaries from FA and then added back the difference between TA and TL to reflect the estimated carrying value of equity in the parent-only financials.  On the FL side I removed the TL of the subsidiaries. 
  2. For Europe (QNB Finansbank) the adjusting entries are FA – 120 + (120-109) and for FL -109. 
  3. For Other (QNB Ahli Egypt) the entries are FA -38 + (38-34) and for FL -34.  For Indonesia FA -7 +(7-6) and FL -6.
  4. What has happened though is that aggregate total of FA and of FL has reduced some QAR 149 billion (USD 41 billion) from FA QAR 277.9 billion to QAR 128.7 and FL QAR 355.3 billion to QAR 206.3 billion. 
  5. Also note that QNB's negative NFA position is concentrated in Europe and appears driven by international borrowings and capital market transactions which have staggered maturities so that absent events of default creditors only access to funds is secondary sales.  That being said there are substantial maturities in 2018. 
If you’ve been paying attention, I expect there are a few out there who would like to ask AA to hold on a minute and explain how he made a QAR 149 billion adjustment between QNB’s consolidated and estimated parent-only financials when the difference between the two sets of financials as shown above is QAR 132 billion on the asset side and QAR 136 billion on the liability side. 
Good question.  I don’t have a numerical analysis to back up the assertion that this is due to transactions between subsidiaries and QNB the parent that would be included in parent-only financials but eliminated in the consolidated ones, plus perhaps some differences in the carrying value of equity in subsidiaries on the parent-only balance sheet versus the FA-FL methodology used by AA.