Cars drive past the building of Qatar Central Bank in Doha.

:: Qatari banks’ funding and liquidity are under varying degrees of pressure from outflows of non-domestic deposits and interbank borrowings, after several Arab countries severed diplomatic and logistical ties with Qatar in June, the latest report from Fitch Ratings says.

The boycott will also increase banks’ financing costs in the international debt markets. The overall impact on each bank will depend on how much it relies on non-domestic sources for its funding.

Banks with a greater reliance on non-domestic deposits include Ahli Bank, Al Khaliji, Commercial Bank, Doha Bank, and Qatar Islamic Bank.

Banks with less reliance include Barwa Bank, International Bank of Qatar, and Qatar International Islamic Bank.

Increased competition

Withdrawal of non-domestic deposits is likely to increase competition among banks for domestic deposits, pushing up funding costs and squeezing margins.

Banks that have been more reliant on non-domestic deposits will need to price generously to attract domestic deposits away from other banks as these tend to be fairly stable – it is easier to keep or roll over existing deposits than to attract new ones.

Deposits represent 75% of Qatari banks’ non-equity funding. At end-May, non-domestic customer deposits accounted for 25% of total deposits, up from 10% two years ago after the Qatari government withdrew substantial deposits as falling oil prices hit revenues.

As banks’ fast lending growth continued, non-domestic deposits filled the gap, mainly from other GCC countries (particularly Saudi Arabia and the UAE) and Asia, attracted by high yields from well-rated banks.

These are less stable than domestic deposits and the boycott of Qatar has brought this into sharp focus.

There have been large net outflows of non-domestic customer deposits (June: $4 billion; July: $4 billion) and non-domestic interbank deposits and borrowings (June: $11 billion; July: $4 billion), according to data from the Qatar Central Bank (QCB).

“GCC creditors account for much of these and we believe Asian depositors have renewed many of their maturing deposits, albeit at slightly higher yields. The outflows are a threat to liquidity given Qatari banks’ large asset-liability duration mismatches. At end-April, 90% of deposits had a contractual maturity of up to one year and 60% of up to three months, although domestic deposits tend to roll over,” says Fitch in the report.

At present, the Qatar government, Qatar Investment Authority (QIA) and other public-sector companies are helping and trying to address the funding and liquidity crunch by placing more deposits in the banking system (up $12 billion in June and $7 billion in July), and the QCB has increased repo facilities and placements (by $8 billion in June and $1 billion in July).

Facing downgrade

All Fitch-rated Qatari banks’ Issuer Default Ratings (IDRs) are on Rating Watch Negative (RWN), reflecting the RWN on the Qatari sovereign and significant uncertainty around the banking system due to the boycott. The IDRs are driven by potential sovereign support and could be downgraded if the sovereign ability to provide support weakens. If the boycott persists, escalates or significantly affects Qatar’s economy, the sovereign could be downgraded.

The banks’ Viability Ratings are also on RWN, reflecting heightened risks to their operating environment, funding and liquidity, as well as earnings and profitability. Banks with higher reliance on non-domestic deposits have greater pressure on their Viability Ratings.