Three of the Qatar’s leading banks - Masraf Al Rayan (MAR, A1 negative, baa21), Barwa Bank Q.S.C. (A2 negative, baa3) and International Bank of Qatar Q.S.C. (IBQ, A2 negative, baa3) called off the three-way merger they had been negotiating since December 2016.

The cancelled merger is credit negative for the Qatari banking system because the consolidation would have balanced the competitive environment in the nation’s small but fragmented banking system, said the top ratings agency Moodys.

Had the merger been successful, the merged entity would have been Qatar’s largest Islamic bank and second-largest bank with total assets of around QR173 billion (around $48 billion) and a market share of around 14 per cent.

The merged entity’s enhanced franchise strength would have helped rebalance the Qatari banking sector, where 18 banks serve a population of only 2.6 million and Qatar National Bank (QNB, Aa3 negative, baa1), the largest bank in the Gulf region, dominates with a market share of more than 40 per cent of domestic assets, said Moodys in its report.

QNB’s outsize domestic loan market share leaves smaller banks to compete for the remaining lending opportunities, driving price competition that negatively pressures asset yields, profitability and, in some cases, leads to inappropriate risk pricing for loans, it stated.

The merger would have eased these pressures and enabled banks to balance their approach to risk pricing, alleviating pressure on profitability, it added.

Likewise, system consolidation would balance the competitive pressure for deposits in Qatar’s concentrated depositor base, which is driving funding costs higherm, said Moodys in the report.

However, since a regional dispute started in June 2017 between Qatar and Saudi Arabia, the UAE, Egypt and Bahrain, government deposits in the system have increased, after declining since 2014 because of lower oilrelated revenue, it pointed out.

Government deposits accounted for 38 per cent of total deposits in the system as of March 2018, up from 26 per cent just before the beginning of the regional dispute, offsetting the outflow of foreign funding, said Moodys in its report.

System consolidation would have modestly softened competition, which would have marginally eased the pressure on rising borrowing costs since domestic funding sources remain tight despite increase in oil prices, it added.-TradeArabia News Service