Qatar Banking Sector: How "Grim" is Grim?

Sure Sounds Much Scarier Than Subdued

AA was in grave danger of slipping further into his monomania on Dana Gas, until Gulf News (Dubai) rode to his rescue with this timely 8 August article:  “Qatar banking system faces grim outlook as sanctions bite”.

“Grim outlook” sure sounds serious.  If Indian banks are facing “subdued” prospects, then Qatar has to be in even worse shape.   

The article’s argument appears based on the following: 

1. Moody’s has placed Qatar’s banking sector on ratings watch negative, a change from stable.  The other rating agencies have taken steps as well.  S&P bumped Qatar’s sovereign rating to AA-.  Fitch has placed Qatar’s AA sovereign rating on its watch list.  In case you don’t know, investment grade extends all the way to BBB- or Baa3. Qatar banks are more dependent on external funding than earlier. 

2. External funding may be withdrawn and the Qatar government’s ability to support its banks has weakened.

3. Qatar’s banks have a “lot” of cross border assets in the GCC and MENA.  AA isn't sure if this is a credit warning about these borrowers ability to repay or about government action to prevent payment.

4. Moody’s expects non-performing assets to increase from 1.7 % at FYE 2016 to 2.2% by FYE 2018. Moody’s also expects ROA to decline from 1.7% for fiscal 2016 to 1.4% for fiscal 2017.

GN’s assessment seems to be based on two things.

1. First, some negative things might occur, e.g., external funding withdrawal, ratings drop, etc. At its current rating Qatar could drop a notch or two and still comfortably be investment grade.  More importantly, things that might occur do not necessarily occur.  Or when they do, there may be solutions. Those with long memories or mentors who lived in exciting times will remember that when international banks cut off funding for the Kuwaiti-owned banks in Bahrain following the Iraqi invasion of Kuwait, the KIA rode to the rescue.   

2. Second, there is negative trend in two metrics:  ROA and ROE. It’s not clear to AA if GN believes that the change in NPA (a 30% increase) or ROA (an 18% decrease) is driving Qatar banks to “grim” territory or whether it is the absolute levels of these figures. 

Let’s put those metrics—ROA and NPLs— into context with a chart drawn from  pages 10-11 in the KPMG report on GCC 2016 banking performance. 

Two things to note about that report. 

• It covers listed banks and not all banks.  Despite the sample composition, the report should provide a directional idea about relative performance. 

• That presumably explains much if not all of the difference between KPMG’s figures and Moody’s who are including unlisted banks in their calculations. 

GCC Banking Performance
	ROA		NPL
Country	2015	2016	2015	2016
Bahrain	1.0%	1.1%	10.7%	9.8%
Kuwait	0.9%	1.1%	2.1%	2.1%
Oman	0.5%	0.8%	1.9%	2.0%
Qatar	1.8%	1.5%	1.7%	1.9%
Saudi	2.0%	1.7%	1.1%	1.3%
UAE	1.4%	1.3%	4.1%	4.0%

Based on the above data, it would seem that using GN’s definition things are at least somewhat grim in the UAE and even more so in Bahrain, Oman, and Kuwait. 

Perhaps, this is Qatar’s way of re-integrating itself into the GCC?

But there’s more. 

Notice that the chart in the GN’s story shows a decline in ROA since 2011 well before sanctions on Qatar had been “born” or had molars to bite, though this may be a testimony to the wise leadership's ability to position for necessary future action.

A January GN article quotes Moody's projections for GCC aggregated banking performance in 2017.  Using that projection as a baseline, it would appear that the "grim" Qatar banking sector will outperform the average GCC bank. 

As to the health of GCC country finances in a low energy price environment and thus their ability to support their local banking sector and economy, there’s a Fitch 5 April report that provides some insights. 

Based on its forecasts for the average 2017 oil price and country projected spending, among the GCC states only Kuwait (USD 45) and Qatar (USD 51) have a break-even price below Fitch’s estimated USD 52.50 barrel price for oil.  Kuwait’s break-even price was influenced by its “high investment income”. 

Bahrain is at USD 84, Oman at USD 75, KSA at USD 74, and Abu Dhabi at USD 60.   Details here. 

Mark AA as skeptical on GN’s assessment which seems more like foreign policy advocacy in search of a “victory” than hard analysis. 

It's a bit early to make a call on the effectiveness of sanctions or of Qatar's workarounds.

A grim scenario may occur, but Qatar has abundant resources to fight sanctions and at present retains access to world financial markets.  One could the case of other sanctioned countries with less financial resources or access to financial markets to draw some conclusions about ability to weather a storm.  Hufbauer et al "Economic Sanctions Reconsidered" may be a useful entry point to such a review.

There is is a more nuanced less alarmist view on Moody's report--as appears to be the usual case--at Abu Dhabi’s The National. No “biting” no scenarios of doom.

Abu Dhabi Commercial Bank 3Q2016 Results: A Tale of Two Newspapers

Where Would We Be Without Ambition?

On 23 October Abu Dhabi Commercial Bank issued its interim unaudited financial statements. 

1. Net profit for the first nine months of the year was AED 3.2 billion versus AED 3.7 billion for the comparable period last year (a decline of 14%). 
2. Net profit for 3Q16 was AED 1.0 billion versus AED 1.2 billion for 3Q16 (a decline of roughly 17%). 
3. The major factor impacting net income was impairment provisions which increased from AED 391 million in the first nine months of 2015  to AED 1.083 for the first nine months of 2016 (an increase of 77% percent) and from AED 66 million in 3Q15 to AED 380 million for 3Q16 (an increase of 475%).

How did UAE’s two flagship English language newspapers cover this story?

The National’s 23 October headline was ADCB Net Profit Falls 17% in Third Quarter

Abu Dhabi Commercial Bank said its third-quarter profit slid by 17 per cent as provisions for bad loans jumped almost six-fold.

Net profit declined to Dh1 billion in the three months to the end of September versus Dh1.2bn in the same period last year, the bank said. Impairment allowances shot up to Dh380 million from Dh66m in the third quarter last year

Two days later Dubai’s Gulf News took a slightly more optimistic view:  ADCB Reports Dh999m in Q3 Profits Figure brings profit for first nine months to Dh3.14 billion.

Abu Dhabi: Abu Dhabi Commercial Bank (ADCB) continued to register growth in net loans and customer deposits in the first nine months of this year despite increased challenges in the banking industry.

“The bank delivered strong financial results for the nine month period of 2016, reporting a net profit Dh3.153 billion and an industry leading return on equity of 16 per cent.   

While the challenging operating environment and the turbulent markets have impacted the industry, our underlying performance and fundamentals remain strong and we continue to grow our businesses. Our balance sheet remains resilient and registered a healthy growth in net loans and customer deposits year to date, 10 per cent and 7 per cent respectively,” said Alaa Eraiqat, ADCB’s group chief executive officer.

In a statement, the CEO reiterated his confidence in the long-term growth of the UAE’s economy, stressing the bank’s strong fundamentals and outlook of delivering value to shareholders.

In the first nine months of this year, the bank’s assets grew 12 per cent to Dh255 billion, while net loans and advances to customers increased 10 per cent to Dh162 billion compared to December 31, 2015.”

Technical notes: 

1. AA’s calculations are based on net change not simply a division of this year’s results divided by last year’s. 
2. Gulf News appears to be using net income attributable to controlling equity holders in the bank not total net income.

What a difference a point of view makes. 

One comes away with two very different conclusions from reading these two articles.

1. Everything sounds just fine from the account in Gulf News. 
2. The National the “hometown” newspaper of ADCB with perhaps more at stake to  paint a rosy picture does not.  In AA’s view it presents a more accurate picture by providing comparatives to prior periods and discussing negatives as well as positives.

Another post to follow soon with comments on things to watch in ADCB's financials. 

Here's a link to the earlier promised post.