May 30, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Qatar. Directors noted that the banking sector is healthy with high asset quality and strong capitalization. As at end-September 2017, banks had capital adequacy ratio of 15.4% and low non-performing loans (NPLs) ratio of 1.5%, with a reasonable provisioning ratio of NPLs (85%). Directors also highlighted that fintech, which will likely create new challenges and opportunities, will require additional regulatory capacity.

The staff report highlights that a robust regulatory framework and effective supervision have helped ensure the resilience of the financial system. Banks are under Basel III regulations for capital, liquidity, and leverage and banks meet the regulatory standards, even under shock scenarios. The banking system is characterized by high loan concentrations—particularly real estate loans—and connected lending. The ongoing efforts that focus on bolstering macro-prudential regulations and strengthening consolidated supervision would help to prevent and mitigate systemic risks. The Qatar Central Bank (QCB) introduced a new loan-to-deposit requirement of 100%, which came into effect in January 2018, to further improve the liquidity profile of the banking system and its asset quality. Basel IV, once adopted, could significantly increase risk-weights, thus impacting banks’ capital ratios, credit risk management, pricing, processes, and disclosure. Thus, an impact study by QCB of Basel IV on banks’ capital adequacy ratios would be useful to inform the appropriate speed of its implementation. In liquidity management, further progress in enhancing monitoring and forecasting would help in anticipating and planning for potential system-wide pressures. Furthermore, the Directors encouraged the authorities to continue to strengthen the AML/CFT framework and address the identified gaps.

The selected issues report highlights that the stress tests of QCB for December 2017 show that the banking system is resilient to severe shocks. QCB conducts stress tests of the banking sector on a regular basis and publishes the results in the Financial Stability Reports. The stress tests on September 2017 data for the banking system examined the impact on banks’ capital ratios of an increase in NPLs by 25% and additional provisioning ranging between 50% and 70%. This note uses publicly available bank-by-bank data, regression analysis, and a range of economic scenarios to revisit the possible impact of lower oil prices, lower economic and credit growth, and lower stock market prices on Qatari banks. Simulation results suggest that banks can comfortably withstand higher NPLs and lower profits. This finding owes to Qatari banks’ strong starting position, with low NPLs, adequate provisioning, and solid profitability. The average capital ratio remains above 16% over the projection period leading up to 2020 (baseline scenario). Moreover, the exercise reveals that the banking system would remain resilient even in the presence of a very severe shock to all the NPL macro determinants.

The staff concludes that QCB’s continued prudent approach to regulation and systemic risk management remains essential. Demonstrated resilience of the banking sector to both actual and hypothetical stress tests speak well of Qatar’s regulatory and supervisory framework. Macro-prudential regulation, particularly capital and liquidity buffers and countercyclical provisioning norms are essential for mitigating the impact of macroeconomic shocks on the banking system and the feedback effects of credit risks on the real economy.

 

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Keywords: Middle East and Africa, Qatar, Banking, Stress Testing, NPLs, Capital Adequacy, Basel IV, IMF

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