Qatar Banks and Financial Institutions to witness a better consolidation in 2021

As per the Fitch ratings, the Qatar’s crowded Banking arena would witness better consolidation that has been prompted by the pressure raised due to banks’ profitability from the Covid-19 pandemic and relevant economic downturn, particularly those with feebler franchises and restricted budgeting power.

Common government ownership is similarly a core driver for merging to generate better capitalised banks with boosted competitive rewards to provision the Qatar Vision 2030 progress plan, the global ratings agency stated in a new report.

Al Khalij Commercial Bank and Islamic bank Masraf Al Rayan’s (MAR) recently approved merger will possibly build up Qatar’s major Islamic bank by total assets and diversify MAR’s business model, which is chiefly wholesale engrossed (85 percent of overall financing).

This will be the second only huge merger in Qatar that took place between an Islamic bank and a conservative bank post the Islamic bank Dukhan and International Bank of Qatar (IBQ) merged in April 2019.

Despite a feebler economic setting and expected descending pressure on valuations from the impression of the pandemic, AKCB was treasured at 8.2 billion Qatari riyals (based on the concluding share price on 5 January), in lieu of 1.14x its tangible book value, comparatively with 1.027x tangible book value for IBQ (A/Stable/bb+ pre-merger).

Dukhan’s merger with IBQ advanced the proportion of retail and private banking deposits (43 percent of total deposits at end-1H20) in its overall funding.

However, the bank still is deficient in stable long-term funding and is yet to view the 100 percent Net Stable Funding Ratio governing obligation. Further Qatari bank mergers could create budget collaborations that ease the pressure on profitability from flattened financing margins and sophisticated loan impairment controls due to the pandemic.

Fitch further announced that “In their viewpoint, it thus, reflects AKCB’s satisfactory funding (end-3Q20: common equity Tier 1 ratio of 14.8 percent against 8.5 percent governing minimum) and private banking niche, an imperative addition to MAR’s business model and funding franchize.”

MAR (the enduring entity) will have a grander funding capacity (147 billion riyals collective non-equity funding) to finance added government projects. This could further upsurge MAR’s exposure to government and government-related entities, which characterized 47 percent of its financing book at end-3Q20, but would provision 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 amalgamation budgets could deteriorate capital. The merger should fortify MAR’s private banking funding franchise, which could diminish the bank’s high dependence on wholesale funding, particularly short-term placements, and curb its loans-to-deposits ratio, which is one of the uppermost in the market.

Dukhan’s Budget-to-Income ratio declined to 32 percent in first half(H1) of 2020 from 38 percent in 2018 post the bank comprehended 90 percent of its strategic budget synergies from its merger.

MAR’s merger should have an outcome in a cost-to-income ratio of about 20 percent, associating well with peers. Mergers can also upsurge banks’ asset quality perils from collateral valuations, variations in loan classification policies and building provisions against purchased credit-impaired assets.

Dukhan’s Stage 2 financing ratio enlarged to 19 percent at end-1H20 from 14 percent at end-2018, largely due to the reclassification of some of IBQ’s loans that had been recorded as Stage 1 at the time of the merger.

Qatari rated banks’ Issuer Default Ratings (IDRs) are “determined by our belief in a tremendously huge probability of national aid for all domestic banks, if desirable, regardless of their franchise and ownership.” Qatari bank mergers are improbable to affect IDRs, but they could distress banks’ standalone creditworthiness, as expressed by their Viability Ratings.

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