After years of strong, if volatile, GDP growth driven by significant debt-fuelled public spending, Qatar is now targeting steadier, more sustainable growth, a report said.

Qatar's economic model will continue to be driven by high public spending, but with tighter planning and oversight of large infrastructure projects, lower public debt (domestic and external), increased private-sector 'crowding-in' and stricter regulation of the banking system, added the report “Qatar's changing model and the banks” released by New York-based Morgan Stanley, a global financial services corporation.

Qatar's broad efforts to reduce external vulnerabilities and drive diversified, sustainable growth have important short- and longer-term implications for the banks, the report noted.

Stricter capital requirements offset slower growth, leaving dividends still at risk, said Morgan Stanley, adding that CBQ (Commercial Bank of Qatar) remains its top pick.

A key aspect of the new Qatari model will be reduced levels of public borrowing and we lower our forecast for medium-term system loan growth to 10 per cent from 15 per cent on the back of faster repayments of public debt (36 per cent of system stock).

Public loans have already started to decline (-6 per cent year-to-date (YTD)). Total system loans have grown 9 per cent YTD, the slowest in nearly four years. Private corporate growth has remained steady at 10-20 per cent year-on-year (YoY) growth for the last five years and seems well supported by sustained government project spending.

As the most exposed to public sector borrowing (57 per cent of group loans), Morgan Stanley expects QNB to be most affected, while private sector lenders CBQ and Doha Bank should continue to benefit from solid corporate credit demand. Its EPS forecasts fall by an average of 4-9 per cent for 2014-16, it said.

Slower forecast domestic loan growth will not put capital and dividends under pressure, Morgan Stanley noted.

The Qatar banks adopted Basel 3 capital rules in the first quarter of 2014. The QCB’s initial minimum capital of 12.5 per cent represents a 250bps increase over Basel 2. We expect further capital buffers to push minimum capital to 14 per cent as soon as next year.

“We think fully loaded capital for larger Qatari banks could be 16 per cent (by 2019). While earnings growth and ROAs remain healthy, strong RWA growth will consume considerable capital at CBQ and Doha Bank. We estimate they each need to raise QR1.5 billion ($411.5 million) Tier 1 capital to keep pace with growth.

“On our forecasts QNB’s organic capital generation will be sufficient. We expect payouts to fall from FY13’s highs at QNB and Doha Bank. There is a risk cuts will be taken badly by income-hungry domestic investors. Having halved its payout in FY13, we think CBQ will maintain its DPS,” Morgan Stanley concluded. – TradeArabia News Service