Moody's Investors Service has changed the outlook on Qatar's banking system to negative from stable due to the weakening operating conditions and continued funding pressures facing Qatari banks.

Moody's report, "Banking System Outlook -- Qatar; Weakening operating conditions and continued funding pressures drive our negative outlook" also captures the potential weakening capacity of the Qatar government to support the country's banks.

The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Qatar over the next 12-18 months.

"Qatari banks' reliance on confidence-sensitive external funding has increased in recent years due to a significant decline in oil-related revenues" said Nitish Bhojnagarwala, a vice president at Moody's. "This leaves them vulnerable to shifts in investor sentiment."

Moody's expects Qatar's GDP growth to slow to 2.4 per cent in 2017 from exceptionally high rates of around 13.3 per cent recorded during the 2006-2014 period; however, it remains the highest in the GCC, driven by high levels of government spending in preparation for the FIFA World Cup in 2022. As a result, domestic credit growth will also slow to the 5 per cent-7 per cent range for 2017 and 2018, down from 15 per cent in 2015.

The gradual economic slowdown, combined with Qatar's ongoing dispute with some neighbouring countries and continued challenges in the construction and contracting sector, will lead asset quality to dip slightly.

"We expect system-wide problem loans to increase to around 2.2 per cent of gross loans by 2018, up from 1.7 per cent as of December 2016," said Bhojnagarwala. Despite this increase, the non-performing loan (NPL) ratio will remain among the lowest in the GCC heading into 2018.

Nonetheless, capitalisation will continue to remain strong providing Qatari banks with substantial cushions to absorb losses. Moody's expects tangible common equity to increase to around 15.5 per cent of risk-weighted assets by end 2018 from 14.4 per cent, as of December 2016, driven by slower-than-normal credit growth and higher profit retention.

A prolonged regional dispute could trigger some outflows of foreign deposits and other external funding (which represents around 36 per cent of total banking system liabilities as of May 2017). As a result, the banks' high liquidity buffers (at 24 per cent as of total assets as of December 2016) would likely reduce, as domestic deposits remain tight due to reduced oil revenues.

"Against this backdrop, Qatari banks' profitability will likely decline, with return-on-assets declining to around 1.4 per cent for 2017, from 1.6 per cent in 2016, driven by increases in funding and provisioning costs,” added  Bhojnagarwala. – TradeArabia News Service