Special Supplement Tuesday 11 December 2018

bankingSMEs have potential to transform Qatar economy: Dr R Seetharaman �P 02

QIIB foresees rapid growth in Islamic finance industry �P 05

Commercial Bank: A great turnaround story �P 11

Qatar has repeatedly proven its continued economic resilience in the face of complex regional challenges. The banking sector in particular has demonstrated continued growth, which has led international agencies to upgrade the ratings of Qatari financial institutions - a clear indicator of the strength and positive outlook of the sector.

Islamic finance industry is a vital part of Qatar’s financial system. QIIB is really interested in activities that offer added value to the relevant sectors in Qatar's overall growth.

The IMF’s latest forecast underscores HSBC’s outlook. The Qatar economy remains stable supported by the strength of the banks and the country’s ratings. These are all key metrics that suggest a strong and steady growth of the economy in the long term.”

The future remains bright for Qatar as a massive expansion of LNG production by about 40 percent will drive investment and consumption starting from 2020

Yousuf Mohamed Al-Jaida, Chief Executive Officer, QFC Authority

Dr Abdulbasit Ahmad Al Shaibei, CEO, QIIB

Abdul Hakeem Mostafawi, CEO of HSBC in Qatar

Rory Fyfe, Managing Director, MENA Advisors

CAPITAL COMMENT

As the blockade has been going on for 19 months and counting, Qatar’s key economic and market indicators are all close to or even above pre-crisis

level. “Qatar has recovered from the blockade..... the future remains bright for Qatar as a massive expansion of LNG pro-duction by about 40 percent will drive investment and consumption starting from 2020. The rest of the economy will be further supported by reforms to the investment and business environment,” says the first Country Report on Qatar by MENA Advisors, headed by former QNB Economist Rory Fyfe.

The report, exclusively shared to The Peninsula, says LNG is Qatar's future. The new LNG projects and reforms to investment and business environment leg-islation are of far greater economic significance.

MENA Advisors, the economic consul-tancy and research company, expects Qatar to record growth of 2.0 percent in 2018 driven by 5.0 percent growth in the non-hydrocarbon sector as a result of a

strong performance in manufacturing and construction.

The banking sector has proven its resil-ience in the last few years by weathering the twin shocks of a crash in oil prices fol-lowed by the deposit flight that followed the blockade. The non-resident deposit base of the banks has been rebuilt nearly back to pre-crisis levels, demonstrating confidence in the banks’ stability. As a result, banks have again started to ramp up lending to the domestic private sector . This easing in financial conditions should further support GDP growth over the next year.

The real Qatar story will begin in 2020. Already the largest LNG producer in the world, Qatar plans to expand production by around 40 percent by 2025. Gas and the condensates associated with it will then comprise nearly 90 percent of Qatar’s energy output, compared with just 10 percent for crude oil, which was the rationale for Qatar leaving Opec in December. The $40bn+ investment related to this plan will begin to come through in a serious way from 2020 as new jobs for engineers, oil services companies and con-struction workers drive up aggregate demand. This is likely to lead to increased

demand for a range of services in the non-hydrocarbon sector from retail to edu-cation and health.

Once production comes on stream from these LNG facilities around 2025, as well as downstream petrochemical facil-ities that utilise their by-products, the economy will receive another leg up for growth. In the peak years as the new capacity comes on stream, real growth could return to double-digit levels for the first time since 2011. The revenue from increased gas production is likely to lead to considerably higher public and private aggregate incomes.

The outlook for the global LNG market has continued to improve. Strong demand growth from China and other Asian coun-tries looking to reduce their pollution levels has been combined with issues on some major projects on the supply side. As a result, the global LNG market is now expected to erode the current excess supply by the early 2020s instead of the mid-2020s. This is well timed with the expiration of a number of Qatar’s original long-term supply agreements and it should be a good environment for Qatar to rene-gotiate these agreements and forge new ones for future decades.

Banking sector proves its resilience: MENA AdvisorsSATISH KANADY THE PENINSULA

ACTING MANAGING EDITORMohammed Salim Mohamed

CHAIRMAN Sheikh Thani bin Abdullah Al Thani

EDITOR-IN-CHIEFDr. Khalid Mubarak Al-Shafi

ADVERTISING COORDINATORSMOHAMMAD SHAMMAS & SAVIO FERNANDES

SUPPLEMENT EDITORSatish Kanady

DESIGNAbraham Augusthy

02 TUESDAY 11 DECEMBER 2018banking

SMEs have potential to transform Qatar economy: Dr R Seetharaman

D oha Bank Group CEO Dr R Seetharaman firmly believes it was Qatar’s well-calibrated moves that helped the country weather the blockade storm.

Qatar demonstrated “remarkable resilience” since the June 2017 economic blockade by implementing a series of legislative reforms, including achievements in finance and infrastructure development, he says.

The country implemented reforms in the past year such as the new Investment Law, permanent residency, food security, Qatar sovereign bond issuance, and other key developments like the Metro Rail project. “In recent times, Qatar’s long-term issuer ratings have been changed from negative to stable by Moody’s Investors Service, which affirmed the long-term issuer and foreign-currency senior unsecured debt ratings at Aa3.

Quoting Moody’s assessment, Dr Seetharaman said Qatar can withstand the economic, financial, and diplomatic boycott by Saudi Arabia, the UAE, Bahrain, and Egypt in its current form, or with possible further restrictions, for an extended period of time without a material deterioration of the sovereign’s credit profile,” The country undertook reforms in Qatar’s free zones, logistic parks, and industrial zones, as well as the incentives being offered to operate in these areas. Some of the incentives offered by Manateq include permits issued within three working days, financing by local banks, rent exemptions in 2018 and 2019, and 50% discount per square metre in rent fees. The QSE Index is up 22 percent YTD. Post-blockade Qatar has managed to increase cultivated land to reach 8,000 tonnes of vegetable production per year.

Elaborating on Doha Bank’s support to help Qatar realise its ambitious Qatar National Vision 2030, its support to private sector and SMEs, he said SMEs are the primary component of liberal economy and social stability. The importance of SMEs lies in their role in growth at various phases of economic development. SMEs not only contribute to output, fulfill social objectives, attract considerable foreign reserves into a country but also have a clear importance in providing employment, which means that they are the backbone of the private sector all over the world. Doha Bank was pioneer in appreciating the importance of the very critical role being played by SMEs in the development of Qatar economy. Doha Bank was the first bank to launch

‘Tatweer’, a dedicated SME unit in 2008.Through this initiative, Doha Bank would continue to participate in Qatar’s diversification story by encouraging the SME Sector. Doha Bank is not only providing funding to SMEs but is also offering complete solutions to SMEs and has also assisted SMEs grow both professionally and business wise.

“We, at Doha bank are proud that our relationships with SME customers have matured along with the customer’s business and professional growth. Doha Bank firmly believes that today’s SMEs are the emerging large cap companies of tomorrow and we already have number of success stories to boast of. Our success stories have encouraged other SME customers to approach Doha Bank for their financing requirements and we share an excellent relationship with them.”

Doha Bank has been very supportive of SMEs and are helping them to be ready for the times ahead by way of providing financing with the help of innovative products and services for their commercial activities. In addition, organizing conferences, workshops, knowledge sharing sessions, etc. has helped SMEs to be ready for the next generation. Apart from lending products which takes care off entire working capital finance, capex financing, Doha Bank SME also offers specialized services like cash management, payroll products, trade services, customized forex solutions, insurance solutions, etc. Doha Bank is also playing an important role in supporting and promoting SMEs through QDB’s indirect lending program, called ‘Al-Dhameen’, which encourages commercial banks in Qatar to lend financial support to SMEs by way of guaranteeing 75 percent -85 percent of the principal outstanding to new as well as existing entities. Doha Bank was one of the earliest signatories to this program and we have made major progress in promoting startups through this program.

The world of opportunities which are currently on offer for SMEs in the backdrop of the massive infrastructure development taking place in the form of ports, roads, rail, hotels, commercial and residential buildings for Qatar National Vision 2030. The development of new stadia and massive refurbishment of the existing footballing infrastructure also presents an excellent opportunity for SMEs to grow further. The growing population in Qatar will also provide fresh opportunities in the areas of organized retailing through Hypermarkets & Supermarkets, educational institutions and health care facilities. Doha Bank will continue to support SMEs in the above sectors as well as other business segments.

On Doha Bank’s long-term outlook for Qatar’s banking sector performance, Dr Seetharaman said the country has emerged as a resilient economy and has responded positively to the embargo and is moving towards self-reliant economy and the country is expected to grow by 2.7 percent in 2018 and 2.8 percent in 2019 as projected by the IMF.

A robust regulatory framework and effective supervision have helped ensure the resilience of the financial system. According to Qatar National development strategy 2018-2022, the government will focus on securing the capital spending required for all major projects, including those related to hosting the FIFA 2022 World Cup. In the back drop of all these, the banking sector in Qatar should have a sustainable and positive long term outlook.

“GCC Economies are set to benefit, albeit temporarily from recovery seen in oil prices, the economies which focus on non-hydrocarbon expansion will see higher relatively. The economic growth is expected to increase in the first half of the next year for most of the GCC nations,” he said.

On Doha Bank’s commercial banking business portfolio performance in 2017 and opportunities in the countdown to FIFA2022, he said. The Stadium construction are going at a full pace and in most cases we understand the structural works are coming to a conclusion, following these completions we expect opportunities will present from the services that needs to installed within the stadium infrastructure that caters to the media, hospitality, training and hosting services. The opportunities from ICT, cabling, broadcasting, HVAC components, seating and other interiors services will provide opportunities

leading to the countdown to FIFA 2022. Apart from the hard infrastructure we do expect peripheral services and facilities that support the FIFA 2022 will provide further opportunities for financing.

Regarding project financing opportunities, Dr Seetharaman said Qatar is land of opportunity given its engagement with the global community to promote trade and investments. “We see a great opportunity and are eager to call this as an opportunity of the decade that is being offered through the planned capacity expansion of the LNG. The capacity expansion of LNG not only offers a great opportunity for banking and financing community it provides a wonderful opportunity to establish a sustainable supply chain that will cater to the LNG industries expansion needs and its ongoing maintenance requirements. This we see could lead the country to a sustainable growth path lead by the LNG industry.”

The planned capacity expansion for LNG shall provide knock on opportunity for power & desalination infrastructure, transmission infrastructure, LNG transportation infrastructure and new investment and JV opportunities on receiving terminals. Further the capacity expansion under LNG could lead to establishment of downstream industries leading to new economic impetus in the long run.

Despite margin compression, increased impairment charges and increased funding costs, Qatar’s listed banks recorded an 8 percent growth in H1, 2018. Your expectations for the fourth quarter performance of banks? “ We expect the listed banks in Qatar to have a modest growth in aggregate of circa 6-8 percent in Q4 .”

Sharing his thoughts on the ongoing Global trade war and its possible impact on Qatar and broader region *(interview was held before the US-China trade war pause announcement) Dr Seetharaman said “the market can expect rise rise in prices, consumer products can get a hit, you will see current account imbalances (arising from trade surplus or deficit) in countries, financial market might turn volatile and will pose challenges to individual country rowth and global growth.”

As cautioned by the IMF, the window of opportunity to keep global growth on track is “narrowing” amid trade disputes and emerging markets crises. “Remember, the Fund had also cautioned against currency wars as a US-China spat threatens to boil over and that “everyone is going to suffer” from a trade-and-currency clash between the United States and China, the world’s two biggest economies.”

SMEs are the primary component of liberal economy and social stability. The importance of SMEs lies in their role in growth at various phases of economic development. SMEs not only contribute to output, but fulfill social objectives. Doha Bank Group CEO Dr R Seetharaman speaks to SATISH KANADY

“We, at Doha bank are proud that our relationships with

SME customers have matured along with the customer’s

business and professional growth.

Doha Bank firmly believes that today’s

SMEs are the emerging large cap companies of tomorrow and we

already have number of success stories

to boast of. Our success stories have

encouraged other SME customers to approach

Doha Bank for their financing requirements

and we share an excellent relationship

with them.”

Dr R Seetharaman Doha Bank Group CEO

Will this be the year when Apple “secures funding” for Tesla, Trump tells Powell “you’re fired” and Labour sweeps to a resounding

victory and names Jeremy Corbyn as prime ministersending GBPUSD to parity?

Saxo Bank, the leading Fintech specialist focused on multi-asset trading and investment, has released its 10 ‘Outrageous Predictions’ for 2019. The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets.

EU announces a debt jubileeIn 2019, the unsustainable level of

public debt, a populist revolt, rising interest rates from European Central Bank tapering/lower liquidity, and

sluggish growth reopened the European debate on how to get ahead of a new crisis.Italian contagion sickens Europe’s banks as

the EU lurches into recession. The ECB resorts to new TLTRO and forward guidance to limit the carnage, but it’s not enough and when contagion spreads to France, policymakers understand that the EU faces the abyss. Germany and the rest of core Europe, which refuses to let the Eurozone fall apart, have no other choice than to back monetisation.

Apple “secures funding” for Tesla at $520/share

Apple realises that if it wants to deepen its reach into the lives of its user base, the next frontier is the automobile as cars become more dig-

itally connected. After all, the late Steve Jobs showed that a company needs to bet big and bet wild to avoid complacency and irrelevance.

Trump tells Powell “you’re fired”

At the December 2018 Federal Open Market Committee meeting,

Federal Reserve chair Jerome Powell signs on with a slim majority of voters in favour of a rate hike - one too many and the US economy and US equities promptly drop off a cliff in Q1 2019. By the summer, with equities in a deep funk and the US yield curve having moved to outright inversion, an incensed President Trump fires Powell and appoints Minnesota Fed President Neel Kashkari in his stead.The ambitious Kashkari was the most consistent Fed dove and critic of tightening US monetary policy. He is less resistant to the idea of the Fed serving at the government’s pleasure and is soon dubbed ‘The Great Enabler’, setting President Trump up for a successful run at a second term in 2020 by promising a $5 trillion credit line to buy Treasury Secretary Mnuchin’s new zero-coupon perpetual bonds to fund Trump’s “beautiful” new infrastructure projects and force nominal US GDP back on the path it lost after the Great Financial Crisis.

03TUESDAY 11 DECEMBER 2018 banking

‘Prime Minister’ Corbyn sends GBPUSD to parity

Labour sweeps to a resounding victory and names Jeremy Corbyn as

prime minister on the promise of compre-hensive progressive reform and a second ref-erendum on a “to-be defined” Brexit deal.With a popular mandate and strong majority in Par-liament, the Corbyn Labour government embarks on a mid-20th century-style socialist scorched earth campaign to even out the UK’s gross inequalities. New tax revenue streams are tapped into as Corbyn brings the UK’s first steeply progressive property tax into being to soak the wealthy and demands the Bank of England help finance a new “People’s quanti-tative easing”, or universal basic income.

Corporate credit crunch pushes Netflix into GE’s vortex

2019 proves the year of credit dominos toppling in the US corporate bond market. It starts with General Electric losing further credibility in credit markets, pushing the credit default price above 600 basis points as investors panic over GE’s $100bn in liabil-ities rolling over in the coming years at the same time as the firm sees deteriorating cash flow generation.

Australian central bank launches QE on housing bust Down Under

In 2019, the curtains close on Australia’s property binge in a catastrophic shutdown driven most prominently by plum-meting credit growth. In the aftermath of the Royal Commission, all that is left of the banks is a frozen lending business and an overlev-eraged, overvalued mortgage-backed property ledger and banks are forced to further tighten the screws on lending.

Germany enters recessionThe crown jewel of the German

economy, representing a cool 14 percent of GDP, is its car industry.

The German car industry was supposed to be a growth juggernaut, registering 100 million sold cars in 2018. In the end, it only managed to unload 81 million cars, a mere 2% more than 2017 and well down from the 5-10% yearly growth rates from 2000s and forward. 2019 will be the peak of anti-globalisation sentiment and will create a laser-like focus on costs, domestic markets and production, and the further use of big data and reduced pollution footprint – the exact opposite of the trends that have benefitted Germany since the 1980s.

X-Class solar flare creates chaos and inflicts $2 trillion of damage

In 2019, as solar cycle 25 kicks into gear, the earth isn’t so lucky and a solar storm strikes the Western hemisphere, taking down most satellites on the wrong side of the earth at the time and unleashing untold chaos on GPS-reliant air and surface travel/logistics and electric power infrastructure. The bill? Around $2 trillion.

Global Transportation Tax (GTT) enacted as climate panic spreads

With the international aviation and shipping industry enjoying substantial tax privileges, they become the targets of a new Global Transportation Tax (GTT) that intro-duces a global ticket tax on aviation and a capital “tonnage” tax on shipping with the price linked to carbon emission footprints. The new GTT pushes up air travel ticket prices and maritime freight, increasing the general price level as the new tax is passed on to consumers.

IMF and World Bank announce intent to stop measuring GDP, focus instead on

productivityIn a surprising move at the International

Monetary Fund and World Bank spring meetings, chief economists Pinelopi Goldberg and Gita Gopinath announce their intent to stop measuring GDP. They argue that GDP has failed to capture the real impact of low-cost, technology-based services . This unprecedented decision by the IMF and the World Bank also symbolises the transition away from the central bank-dominated era .

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201910 Surprise Predictions for

Saxo Bank, the leading Fintech specialist focused on multi-asset trading and investment, has released its 10 ‘surprise predictions’ for 2019. The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets.

04 TUESDAY 11 DECEMBER 2018banking

QIIB committed to Qatarisation

MOHAMMAD SHOEB THE PENINSULA

Qatar International Islamic Bank (QIIB), one of the leading Shariah-compliant banking and financial services providers in the country, affirms it is committed to the

national goal of achieving Qatarisation at all staff levels.

The Bank realises that one of its greatest assets is its workforce. To enhance their skills, competence, and assist them achieve their career potential, QIIB allocates significant resources for the development of its employees to make them more efficient and customer-friendly.

The QIIB group is driven by its corporate identity that reveals its purpose, how it works and what it aspires to achieve. It reinforces its com-mitment to provide financial products and services to the national economy while remaining true to the Shariah-principles and Qatari roots upon which we were founded.

The Bank, since its inception in 1991, has been working with a mission to provide Shariah-com-pliant financial services that meet the needs of its customers, the economy and the country’s vision and to always hold in high regard its customers, the relationships it hold with them and be com-mitted to their aspirations.

The Bank’s activities, over the last 27 years, are guided by a clear vision to be the most effi-cient Islamic financial institution, performing to the best global standards, serving the commu-nities wherever it serves, and to be the first choice banking partner for the citizens and expatriate communities living in Qatar.

QIIB is also guided with certain high moral values, which include embracing and retaining its identity as a modern bank with traditional values, always striving for excellence in everything it does and every interaction the bank’s employees have with clients, demonstrating its commitment to its customers and the country, using teamwork to deliver to the highest possible standards, pro-moting an open and honest banking envi-ronment, taking ownership and responsibility for the work it does, recognise others for their hard work and achievements, elevate its customer service beyond all expectations.

Over the last more than two and a half decades, QIIB has come a long way as a full-service bank committed to Shariah principles. Today QIIB is well-placed to provide a full array of retail and corporate banking services to its growing customer base.

As a customer-centric bank, QIIB’s role in the banking landscape is gaining prominence as Islamic Banking acquires momentum as a viable and sustainable proposition alongside conven-

tional banking.QIIB is listed on the Qatar Stock Exchange and

provides comprehensive banking services to its customers through a wide network of branches encompassing various regions of Qatar, including shopping malls and other places of strategic importance. The bank also has diverse regional and international partnerships in overseas markets.

The Bank is rapidly growing as one of the prominent Islamic lender in the Middle East region and beyond. QIIB continues to explore new markets for strategic alliances.

QIIB’s guiding principle is to provide modern Shariah-compliant financial services to meet its customers’ expectations and satisfy their needs in an efficient, user-friendly manner. It is also guided by its commitment to deliver value to its customers, shareholders, and employees con-sistent with their aspirations.

In the retail banking segment, QIIB operations focus on efficient delivery channels and person-alised service. The branch network covers major population areas that provide convenient access to customers across the country.

For the Internet and Mobile Banking services, it maintains a 24x7 call centre that provides addi-tional access and convenience, and enhances the security aspects of QIIB banking operations.

The Bank offers various deposit and financing services to customers. Additionally, it offers various products, including debit cards, credit cards, safe deposit boxes, investment services, money transfers and foreign exchange services.

QIIB’s Retail Banking division has expanded to offer specialised financial services to small and medium-sized enterprises (SMEs) and other busi-nesses through a dedicated department staffed with seasoned bankers who are able to respond in a timely manner to the varying and growing needs of this important segment of the economy.

To corporate customers, QIIB offers a wide variety of financing and deposit services to large corporations in all segments of the economy. The bank’s relationship managers are experience bankers with the depth and understanding of the complex needs of larger corporations. Syndica-tions and financing agreements with other major banks have also allowed QIIB to provide seamless service to its corporate customers.

Under its investment services and corre-spondent banking segment, QIIB’s network of global correspondent banks ensures timely delivery to facilitate money transfers and facil-itate foreign trade services to its customers. The bank’s global access through its network permits seamless flow of service and the availability of different investment alternatives to meet cus-tomers’ needs.

The bank’s financial performance has also

witnessed significant growth. QIIB posted a net profit of QR832m for the financial year that ended on December 31, 2017, with a growth rate of 6 percent compared to 2016.

QIIB’s total assets at the end December 31, 2017 reached to QR46.6bn, with a growth of 9.6 percent compared to 2016.

The customer deposits increased to reach QR32.5bn in 2017 compared to QR26.6bn in 2016.

QIIB is a highly rated bank and enjoys a prom-inent financial position.

International rating agencies had affirmed QIIB’s strong position as it acquired distinguished credit ratings with an ‘A2’ from Moody’s and an ‘A’ from Fitch with a stable outlook from both.

These rating agencies have commented on the strong financial fundamentals of the bank, in par-ticular its high capitalisation levels.

These ratings were sought by QIIB in the context of its strategic plan to access international capital markets with Islamic Sukuks, as part of its expansion objectives and continuing commitment to its customers to assure their confidence in the bank by maintaining a strong financial position. The ratings indicate the relative creditworthiness of QIIB as being of low credit risk and its strong ability to fulfill financial obligations to creditors, including depositors and holders of other rights.

In terms of overseas expansion it has grown exceptionally well. Within the framework of QIIB’s efforts to take its success to the regional market, it acquired a license from Bank Al-Maghrib (Morocco’s central bank) in 2016 to establish a joint venture Islamic bank – ‘Umnia Bank’ in the Kingdom of Morocco in partnership with the Credit Immobilier et Hotelier.

When it comes to recognition and awards QIIB is the recipient of many prestigious awards. The Bank received the “2017 Banking Excellence Award” for its excellence in straight-through processing from the World Union of Arab Bankers, thus affirming the distinguished position of the bank in terms of integrated services pro-vided to its clients.

QIIB has bagged the “QDB Al-Dhameen Best Partner Bank Award” meant for the most important local banks that support Qatar Development Bank’s Al-Dhameen programme, an indirect loan facility for small and medium enterprises (SMEs) and entrepre-neurs in the country.

QIIB has bagged the award for the ‘Best Growing Qatari Bank in the Banking Card Industry in 2016’, instituted by Visa International for banks achieving the highest growth rate in the card sector in countries where they operate. QIIB received the ‘Best Islamic Bank in Qatar 2016’ award from International Finance Magazine at an event held in Dubai early this year. And late last year, Cambridge IF Analytica honours QIIB with the award for “Best Islamic Bank in Qatar” in Retail Services 2016.

QIIB’s guiding principle is to provide modern Shariah-compliant financial services to meet its customers’ expectations and satisfy their needs in an efficient, user-friendly manner. It is also guided by its commitment to deliver value to its customers, shareholders, and employees consistent with their aspirations.

The QIIB group is driven by its corporate

identity that reveals its purpose, how it works and what it aspires to achieve.

It reinforces its commitment to provide

financial products and services to the national economy

while remaining true to the Shariah-principles

and Qatari roots upon which we were

founded.

Qatar First

05TUESDAY 11 DECEMBER 2018 banking

SATISH KANADY THE PENINSULA

Islamic financing asset growth rate will continue to expand, driven by sustained strategic objectives to grow the Islamic finance industry, both domestically and globally. There will also be continued

growth in demand for Islamic products by cus-tomers, *said Dr Abdulbasit Ahmad Al-Shaibei, QIIB Chief Executive Officer.*

Sukuk issuance in 2017 increased by 45.3%, reaching $97.9bn, up from $67.4bn in 2016, underpinned primarily by the “jumbo issuances” of some Gulf Cooperation Council (GCC) coun-tries. Driving this performance, were good liquidity conditions in the GCC and, more gen-erally, in the Organisation of Islamic Cooper-ation (OIC) countries, as well as activities by some countries with the goal of further devel-oping their Islamic finance sectors.

Global rating agencies recently pointed out some issuers were able to choose sukuk over bonds because they were less pressed for time to raise funds.

Dr Abdulbasit said the Islamic financial sector has the potential to contribute to the

achievement of sustainable economic devel-opment in many ways. It helps improve access to finance, be an effective tool in empowering capital markets.

On the financial front, Islamic finance offers a window of opportunity that could be used in bridging the gap in financing for development.

He said the number of Islamic banks in OIC countries increased from 169 in 2015 to 178 in 2017. The total amount of Shariah-compliant financing went up from $854bn in 2015 to $1017bn in 2017.

Dr Abdulbasit said the projected growth in the OIC will further trigger the Islamic finance sector. The average rate of growth in the OIC countries will likely to increase, with average growth rate forecasted to be around 4.1% in 2018 and 4.2% in 2019.

The increase in oil prices is supporting recovery in domestic demand in oil exporting OIC countries.

Dr Abdulbasit noted the Islamic finance industry is a vital part of Qatar’s financial system and has displayed total resilience in the face of recent volatile economic conditions. Citing numbers revealed by Qatar Financial Centre (QFC) recently, Dr Abdulbasit said outpacing the

growth of conventional assets, Qatar’s Islamic finance assets have grown at a CAGR of 11% over the last five years and 13% in 2017 alone.

The value of these assets reached $119bn in 2017, accounting for 22% of the financial sys-tem’s assets.

Qatar, he noted has great potential not only to sustain the industry’s double-digit growth but also to increase its share of overall financial assets.

In Qatar, Islamic banks have been the key driver of Islamic finance growth in recent years, growing by 13% CAGR in the last five years. They hold the largest share of Islamic financial assets, worth $97bn in 2017.

The Islamic segment in asset management is larger than the conventional segment. Shariah-compliant investment funds make up more than half the asset management sector in Qatar, with $224mn in assets under management (AuM).

QIIB foresees a continued growth to Qatari economy. Non-hydrocarbon output grew by about 6% during the first half of 2018, as the economy recovered from the impact of the dip-lomatic rift and oil prices surged.

IMF projects a 2.4% real GDP growth for Qatar in 2018, up from 1.6% in 2017. Headline

inflation remains subdued. The country’s fiscal and external positions are strengthening, and the central bank’s foreign exchange reserves have increased. Monetary and financial conditions have improved significantly, with banks attracting non-resident flows.

Dr Abdulbasit said QIIB is committed to encouraging creativity and innovations in the finance sector across the region. The year 2018 had witnessed the bank’s capability in achieving its target growth in terms of the most important financial indicators including financials, deposits and assets portfolios, thus helping it to maintain high ratings assigned to it by global credit rating agencies.

Dr Abdulbasit said the bank’s performance was solid and was very much in line with the bank’s growth trajectory, be it in terms of the growth rates, expansion of the customer base or other main financial indicators.

“Having reviewed the financial indicators of QIIB by the end of 2018, we find that our Bank’s financial position remains strong. This reflects the implementation of the bank’s interim plans and strategy and its ability to benefit from the strength of the Qatari economy.”

QIIB foresees rapid growth in Islamic finance industry

Islamic financial sector has the potential to contribute to the achievement of sustainable economic development in many ways. It helps improve access to finance, be an effective tool in empowering capital markets.

Dr Abdulbasit Ahmad Al-Shaibei, QIIB Chief Executive Officer

06 TUESDAY 11 DECEMBER 2018banking

Key indicators point to an economy that has largely recovered from the blockade. Most key economic and market metrics are close to or better than their pre-

blockade levels. While an end to the blockade would provide a small boost, the economy will remain resilient even were it to continue. Domestic trends, such as the infrastructure buildout, new LNG projects and reforms to investment and business environment legislation are of far greater economic significance.

Growth in 2018We expect Qatar to record growth of

2.0% in 2018 driven by 5.0% growth in the non-hydrocarbon sector as a result of a strong performance in manufacturing and construction.

Manufacturing accelerated toa-round6.5% in 2018( from 2.2% in 2017) as a result of higher production fromLaffan refinery, an expansion in light industry, as part of the self-sufficiency drive that fol-lowed the blockade, and base effects fol-lowing the shutdown of the Pearl GTL facility for part of 2017.The main drivers of growth in manufacturing are unlikely to persist and we expect growth in the sector to

slow for a few years, until major new petro-chemical facilities are built some time in the mid- to late-2020s.

The construction sector was an important driver of growth in 2018, expanding by around 14.7%. However, this sector is in a secular slowdown (growth was recently revised to well over 20% for 2017) as the infrastructure programme has past its peak.

The rest of the non-hydrocarbon sector, excluding manufacturing and construction, remained sluggish at an estimated 1.2%, partly due to the dampening effects of the blockade on some sectors such as trade, but also due to more secular trends including a slowdown in population growth, to 2% in 2018, from 4% in 2017, related to the peaking in the infrastructure program, the blockade and continued fiscal consolidation.

2019 Outlook In 2019, growth is likely to pick up mar-

ginally as the drag on the overall economy from the blockade fades and confidence

recovers, helping trade, investment and consumption. The non-hydrocarbon sectors, excluding construction and manufacturing, should receive a boost to growth with sectors such as retail, entertainment, travel and tourism accelerating.

The banking sector has proven its resil-ience in the last few years by weathering the twin shocks of a crash in oil prices followed by the deposit flight that followed the blockade. The non-resident deposit base of the banks has been rebuilt nearly back to pre-crisis levels, demonstrating confidence in the banks’ stability. As a result, banks have again started to ramp up lending to the domestic private sector . This easing in financial conditions should further support GDP growth over the next year.

However, the slowdown in the con-struction sector is likely to continue as we are now past the peak of the infrastructure investment programme. Government expenditure is likely to remain restrained due to lower oil prices and continued efforts to keep a lid on spending. The budget should be announced soon and we expect small increases in current spending to be offset by lower capital expenditure. Finally, as dis-cussed above, the manufacturing sector was an important driver of growth in 2018 due to a number of one-off factors. These are not expected to persist into 2019. Therefore, we expect a marginal slowdown in growth in the non-hydrocarbon sector to around 4.8%.

The hydrocarbon sector remains in a secular low-level decline. Existing LNG facilities are operating at full capacity and production is declining at maturing oil fields. This decline is likely to persist until the new LNG facilities are completed in the mid-2020s resulting in a dramatic and rapid increase in hydrocarbon output. The sector is expected to contract by around 0.5% in 2019.

As a result, overall growth in the economy should be around 2.2% in 2019.

Oil forecastOil prices have been high in 2018,

averaging $71 per barrel, due to OPEC-led production controls and supply outages in countries such as Venezuela as well as uncertainty around demand from the US and China. Overall the market was slightly oversupplied by around 700k barrels per day (b/d), but persistent uncertainty and risks kept prices elevated. The sharp drop in prices since November came after the US waived Iranian sanctions for certain large consumers, despite Saudi Arabia and Russia already raising production to offset the expected impact of the sanctions on supply, leading to a flood of oil onto the market. In addition, US shale production has continued to creep up throughout the year.

Looking forward to 2019,while we expect a partial recovery from the recent lows, the annual average is likely to be less than 2018, at around $65/b. This is because the excess supply in the market is likely to grow further to about 800k b/d. This assumes OPEC cuts of around 1.3m b/d, which would be more than offset by the expected increase in production by the US and other OPEC+ producers. Meanwhile, demand is forecast to grow by around 1.4m b/d which is subject to downside risks should global growth slow by more than expected. Our forecast of $65 is also broadly in line with the breakeven price of US shale oil producers, the current marginal producer in the market.

2020s: Hitting replay on the 2000s

The real Qatar story will begin in 2020. Already the largest LNG producer in the world, Qatar plans to expand production by around 40% by 2025. Gas and the conden-sates associated with it will then comprise nearly 90% of Qatar’s energy output, com-pared with just 10% for crude oil, which was the rationale for Qatar leaving Opec in December. The $40bn+ investment related to this plan will begin to come through in a serious way from 2020 as new jobs for engi-neers, oil services companies and con-struction workers drive up aggregate demand. This is likely to lead to increased demand for a range of services in the non-hydrocarbon sector from retail to education and health.

Once production comes on stream from these LNG facilities around 2025, as well as downstream petrochemical facilities that utilise their by-products, the economy will receive another leg up for growth. In the peak years as the new capacity comes on stream, real growth could return to double-digit levels for the first time since 2011. The revenue from increased gas production is likely to lead to considerably higher public and private aggregate incomes.

We flesh out these drivers in a more detailed report How will Qatar’s multi-billion dollar LNG expansion impact the economy?, but do bear in mind that this only considers the original three LNG trains and 30% increase in production expected at the time. Plans for a fourth train were con-firmed in September. Furthermore, the outlook for the global LNG market has con-tinued to improve. Strong demand growth from China and other Asian countries looking to reduce their pollution levels has been combined with issues on some major

projects on the supply side. As a result, the global LNG market is now expected to erode the current excess supply by the early 2020s instead of the mid-2020s. This is well timed with the expiration of a number of Qatar’s original long-term supply agreements and it should be a good environment for Qatar to renegotiate these agreements and forge new ones for future decades.

Reforms The blockade has prompted Qatar to

push forward on a number of reforms that should be supportive of longer-term devel-opment and growth. As relations with their neighbours have deteriorated, Qatar has looked to strengthen investment and trade with the wider international community. A number of steps to improve the business environment have been taken, most notably relaxing visa requirements and permitting foreign investors to own 100% of new companies (this law still requires sign off from the Emir and may be subject to restrictions in some sectors). In the stock market, a number of companies have increased foreign ownership limits. An ongoing push to revitalise economic zones and attract foreign investors is also positive.

Bottom LineIn short, Qatar has had a challenging

couple of years with the blockade, but it is now through the worst of it, as demon-strated by the fact that it had one of the best performing global stock markets this year. Although Qatar is not out of the woods yet, by the early 2020s, the well timed expansion of Qatar’s LNG production is likely to provide a considerable boost to growth and incomes throughout that decade.

Future remains bright for Qatar“The real Qatar story will begin in 2020. Already the largest LNG producer in the world, Qatar plans to expand production by around 40% by 2025. Gas and the condensates associated with it will then comprise nearly 90% of Qatar’s energy output, compared with just 10% for crude oil, which was the rationale for Qatar leaving Opec in December.” Following is the full text of MENA Adivsors’ Qatar Country Report.

In 2019, growth is likely to pick up marginally as the drag on the overall economy from the blockade fades and confidence recovers, helping trade, investment and consumption. The non-hydrocarbon sectors, excluding construction and manufacturing, should receive a boost to growth with sectors such as retail, entertainment, travel and tourism accelerating.

Qatar has recovered from the blockade with key economic and market indicators all close to or even above pre-crisis levels. The focus is now on the LNG expansion which gets underway in the 2020s.

We expect Qatar to record growth of 2.0%in 2018 driven by 5.0% growth in the non-hydrocarbon sector, with construction and manufacturing contributing the bulk of this growth.

In 2019, the drag on the overall economy from the blockade should fade as financial conditions and confidence recover, helping trade, investment and consumption.

However, there will be some drags on growth in 2019 as the government is likely to remain conservative on spending (we expect oil prices to average $65 next year), the infrastructure programme has peaked and lower growth in manufacturing is likely. Overall in 2019, we expect growth of 2.2% with growth of 4.8% in the non-hydrocarbon sector.

Nonetheless, the future remains bright for Qatar as a massive expansion of LNG production by about 40% will drive investment and consumption starting from 2020. The rest of the economy will be further supported by reforms to the investment and business environment.

07SATURDAY 1 DECEMBER 2018 banking

Average

08 TUESDAY 11 DECEMBER 2018banking

Qatar Islamic Bank (QIB) is the first Islamic bank in Qatar that started its operations in1982. Currently, QIB is the largest Islamic Bank in the country today as the bank

holds 42.3 percent share of the Islamic banking sector and approximately 11 percent of the total domestic banking sector. As of end Sep-tember 2018, the total Shareholders’ Equity of the bank amounted to QR15.1bn ($4.1bn) with total assets reaching QR152.5bn ($41.9bn).

QIB conducts its domestic business through a stretched modern branch network spread throughout Qatar with key branches featuring distinctive centers with specialized relationship managers focused on servicing specific customer segments: Private Banking Centers, Affluent Banking Centers, as well as Ladies Banking Centers. In addition to its branch network, the Bank has accelerated its investments in digital channels providing its services through the QIB award-winning Mobile App, internet banking applications for individuals and companies, multi-functional ATMs, Interactive Teller Machine (ITM) and an award-winning Call Center.

QIB’s growth strategy is built on its position as a leading Islamic Bank with a cus-tomer-centric approach and strong engagement with the local communities. The Bank’s strategy works along-side Qatar’s National Vision 2030 and the Government’s commitment to investments in the country’s infrastructure, diversification of the economy and the development of a strong private sector. QIB is a stable financial group cov-ering all segments of the financial markets, including individuals, government institu-tions, large corporations and SMEs providing innovative Sharia’-compliant banking solutions.

QIB Group has a stake in a number of Sharia’-compliant Qatari financial services companies. Which includes QInvest, its investment banking subsidiary, Beema (Takaful solutions provider) and Al Jazeera Finance (Consumer Finance company).

The Group has established an interna-tional presence in key markets to be able to better serve the cross-border needsof its cus-tomers as well as to develop a focused presence in geographies with high interest in Islamic banking services. QIB-UK is a sub-sidiary that was established in 2008 covering the financial needs of Qatari individuals and companies in the United Kingdom. Fur-thermore, the bank apresence in Lebanon through Arab Finance House and one branch in Sudan.

QIB RatingsMoody’s Rating: In July 2018, Moody’s

Investors Service (Moody’s), have affirmed QIB’s deposit ratings to A1 with a “stable” outlook. In turn, reflect the bank’s adequate capital buffers, good profitability, and limited

market funding reliance, underpinned by its established and growing retail and corporate Islamic banking franchise and the bank’s rapid growth in recent years. This outlook confirms the resilience of the banking industry which has adapted to the current situation and has overcome challenges with the support from the government.

Fitch Rating:In June 2018, Fitch Ratings upgraded Qatar Islamic Bank’s (QIB), outlook to ‘stable’. Fitch report said, “This action follows the revision of the Qatari sovereign’s Outlook to Stable from Negative and affir-mation of the country’s Long-Term IDR at ‘AA-’ and reflects Fitch’s view that Qatar has successfully managed the fallout from last year’s rupture of trade, financial and diplo-matic relations. Public sector liquidity injec-tions have stabilized the banking sector and stemmed the outflow of non-domestic funding. The fiscal deficit has narrowed sharply and we expect it to turn into a surplus in 2019. The economy has reconfigured its supply chains and continues to grow at a robust pace.”

Capital Intelligence (CI) Rating: In April 2018,Capital Intelligence (CI), the interna-tional credit rating agency,affirmed Qatar Islamic Bank’s (QIB), Qatar’s leading Islamic Bank, Financial Strength Rating (FSR) at ‘A’ with a stable outlook, Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at ‘A+’ and ‘A2’, respectively.

The FSR is supported by good overall capital adequacy including a strong and improved CET-1 ratio, generally good asset quality and improved estimated net financing margin and operating profitability, which is underpinned by a low-cost base. QIB’s position as the leading Islamic bank in Qatar is also a supporting factor given the demonstrated preference amongst Qataris for personal banking on a Sharia’-compliant basis.

Standard & Poor’s (S&P): In April 2018, The International credit rating agency, Standard & Poor’s (S&P) affirmed that QIB has coveted ‘A-’ issuer credit rating.According to the report issued by S&P, the major contributing factors strength-ening QIB’s rating include the Bank isthe largest Islamic Bank in Qatar and second-largest player in the market, its sound financial performance, and its strong capitalization.

S&P, one of the top three international rating agencies, cited: “The rating reflects our views of the bank’s robust corporate banking franchise and favorable position as Qatar’s largest Islamic Bank. QIB’s capital is strong and supports the bank’s rating. QIB’s funding profile is now more balanced. QIB’s stable funding ratio reached 113.9 percent at year-end 2017. The bank’s liquidity is also ade-quate with around 7% of assets placed in liquid forms and another 20 percent placed mostly in Qatari government sukuk”.

The rating affirms the Bank’s success in successfully implementing our long-term growth and performance objectives and speak to the strength of the banking industry in Qatar.”

Overall Strategy QIB’s vision is to be a leading, innovative

Islamic bank adhering to Sharia’ and ethical principles, whilst meeting international banking standards. QIB intends to achieve this by: � Consolidating its domestic presence and

optimizing the value of its existing inter-national presence;

� Expanding wholesale banking and becoming a flagship of Islamic banking for Qatari Inc. companies;

� Modernizing personal banking and becomea leading technology-driven bank;

� Reengineering operations and IT to become leaner and customer-centric driven;

� Upgrading human capital, rich employee talent and becoming an employer of choice in Qatar;

� Expanding its private banking and wealth management operations, strengthening its network of corporate clients and increasing cross-selling between QIB and its subsidiaries and associates;

� Originating new banking and investment products and solutions within an inte-grated systems framework;

� Continuously improving internal man-agement systems in order to achieve optimal productivity and focus on cor-porate governance.

Sustainable Growth:The Bank has enjoyed a steady

growthpace during the last years. During the first 9 months of 2018, it achieved several positive financial indicators:

� Net Profit attributable to the Share-holders of the Bank amounted to QR2,005m for the nine months’ period ended September 2018 representing a growth of 13 percent for the same period in 2017.

� Total Assets of the Bank has increased by 1.4 percent compared to December 2017 and now stands at QR152.5bn.

� Financing activities have now reached QR106.4bn having grown by 3.7 percent compared to December 2017.

� Customer Deposits of the Bank now stand at QR102.9bn up by 1 percent compared to December 2017.

� Total Income for the nine months’ period ended 30 September 2018 was QR5,108m registering a growth of 8.2 percent com-pared to QR4,722m for the same period in 2017. Income from financing and investing activities has grown by 8.3 percent to reach QR 4,528m at the end of the nine months’ period ended 30th Sep-tember 2018 compared to QR4,183m for the same period in 2017.

� QIB was able to maintain the ratio of non-performing financing assets to total financing assets at 1.1 percent reflecting the quality of the Bank’s financing assets portfolio and its effective risk man-agement framework.

� QIB continues to pursue the conservative impairment provisioning policy with the coverage ratio for non-performing financing assets at 127.9 percent as of September 2018.

Innovative Products, Services, and New Branches.

QIB is constantly working to develop and renovate its products and services for the Bank’s individual, corporate and SME clients.Recently, QIB has launched the ‘Instant Financing’ – the fastest and simplest way to obtain personal financing in Qatar. The inno-vative fully-digital new feature allows pre-approved customers to get additional per-sonal financing in a few clicks through QIB’s award-winning Mobile App. QIB takes pride in being the first Bank in Qatar and the first Islamic Bank in the world that offers a full digital experience which provides financing to its customers. The service enables existing customers of the Bank to get top up financing instantly, in a completely paperless and digital manner without the need to visit the branch.

Furthermore, in the last couple of months QIB has launched a unique set of financial products including the second series of the Certificate of Deposit for individuals and cor-porate customers in both Qatari Riyal and US Dollar for different tenors of one and two years and a brand-new VISA Signature credit card dedicated to the Bank’s ladies’ cus-tomers covering their specific financial needs and aspirations. In appreciation to its loyal customer base, the Bank has launched several marketing campaigns introducing special offers while signing new financing deals while using QIB credit cards (in collab-oration with VISA International and Mas-terCard). The last addition to the QIB’s product suite is the introduction of the prepaid type of cards, the bank has launched a new reloadable prepaid card in partnership with VISA, as well as the introduction of the “Hadiyati” Gift Card.

QIB has upgraded its mobile banking app with a brand-new solution which provides a simple, secure, fast and intuitive experience to all its customers.QIB has introduced an array of new convenient features which include an easy and secure biometric log in, e-cash transfer functionality to send money that the recipient can collect at any QIB ATM without the use of a card, ability to request a

digital ticket through the app while visiting a QIB branch to minimize waiting time, as well as real-time management of debit and credit cards allowing activation, blocking, and PIN changes for all QIB cards.

Awards 2018 In light of the Bank’s performance and

continuous innovation, QIB has been recog-nized by reputable international financial publications and reports as one of the leading regional Banks during 2018.

QIB received the below awards: Best Islamic Financial Institution in the

Middle East 2018, by Global Finance. Islamic Bank of the year 2018 in Qatar, by

The Banker – Financial Times Group Best Islamic Financial Institution in Qatar

2018, by Global Finance Best Islamic Bank in Qatar, by Islamic

Finance News (IFN) Islamic Bank of the Year, Qatar 2018, by

The Assets Magazine Best Islamic Bank in Qatar 2018, by

Middle East Banking Awards(EMEA) Best Islamic Bank in Qatar 2018, by The

New Age Banking Summit Best Islamic Bank in Qatar, by The World

Union of Arab Bankers (WUAB) Qatar’s Best Consumer Digital Bank

Award 2018, by Global Finance magazine Excellence in Mobile Banking 2018, by

The New Age Banking Summit Best Portfolio Growth 2018, by Qatar

Development Bank (QDB) Best Islamic Deal, Qatar 2018, by The

Assets Magazine Best Islamic Deal - Shariah adviser 2018,

by The Assets Magazine Best Islamic Financial Institution for

Large Corporate 2018, by Global Finance Best Islamic Project Finance Provider

2018, by Global Finance Best Real Estate Deal of the Year 2018, by

Global Finance Best Sukuk Deal of the Year 2018, by

Global Finance Best Deal of the Year in Qatar, by Islamic

Finance News (IFN) Structuring Deal of the Year, by Islamic

Finance News (IFN) Best Prepaid Product in Qatar, by Visa

InternationalIn addition, for the second year consecu-

tivelyNew York-based Global Finance Mag-azine has named QIB the safest Islamic Bank in Qatar in 2018. Marking a new addition to its list of achievements, QIB was also recog-nized as the 2nd safest Bank in Qatar and the 11th safest Bank in the Middle East.

Corporate Social Responsibility (CSR)As a pioneer of Islamic Banking and an

active partner providing continuous support to community activities, QIB places social responsibility at the very top of its priorities. This is reflected in substantial contributions for supporting human, health, educational, and sports activities as part of QIB’s social responsibility programs.

During 2018 QIB marked aninnovativein-itiative bysigningan exclusive agreement with INJAZ Qatar which sponsors a three-year financial literacy program for selected high schools and universities in Qatar. The QIB-INJAZ collaboration launched the “Per-sonal Finance Program” curriculum. The program is a five-week training with inter-active and engaging sessions tailored specifi-cally for high school students and university freshmen, aged from 15 to 19 years old. QIB and INJAZ Qatar will offer the program to 1,250 university and high school students over the coming 3 years, starting from aca-demic year 2018/2019. QIB expert staff have also committed to delivering program ses-sions alongside INJAZ Qatar volunteers.

Qatar Islamic Bank: Strong credit ratings confirm growth and development QIB’s growth strategy is built on its position as a leading Islamic Bank with a customer-centric approach and strong engagement with the local communities. The Bank’s strategy works along-side Qatar’s National Vision 2030 and the Government’s commitment to investments in the country’s infrastructure, diversification of the economy and the development of a strong private sector.

09TUESDAY 11 DECEMBER 2018 banking

ASEAN: Well-Positioned Against Headwinds

ROA Of ASEAN Banks – Reasonable Returns

— ASEAN banks will continue to experience modest growth due to headwinds from trade war and emerging currency sell-off.

— Profitability remains good despite margin pressure, thanks to cost control measures and lower provisioning costs.

— Asset quality measured by reported nonperforming loans has either stabilized or declined.

— ASEAN banks have good capital levels, having accumulated buffers during previous years, and are well-positioned to face external headwinds.

Long-Term Trend Of Declining Loans Growth

F--Forecast. Source: S&P Global Ratings.

F--Forecast. Source: S&P Global Ratings.

Asset Quality Trends – Ratios Look Healthy

F--Forecast. Source: S&P Global Ratings.

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015 2016 2017 2018F 2019F

Singapore Malaysia Indonesia Thailand

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Indonesia Malaysia Philippines Singapore Thailand Vietnam

2013 2014 2015 2016 2017 2018F 2019F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Indonesia Malaysia Philippines Singapore Thailand

2013 2014 2015 2016 2017 2018F 2019F

10 TUESDAY 11 DECEMBER 2018banking

Fixed income: Preparing for the slowdown

ALTHEA SPINOZZI, FIXED INCOME SPECIALIST AT SAXO BANK

Leaving a troubled summer behindWe are emerging from a particularly eventful

summer in the markets. We have seen the Argentine peso tumble, falling 50% year-to-date of its value against the greenback, provoking a deep sell-off in sovereigns of these countries. Although things appear to have started to stabilise again, the reality remains alarming. Iin Argentina the $57.1bn credit line provided by the Interna-tional Monetary Fund may not be enough to pull the country out of its political and economic difficulties.

At the same time, tensions in Europe have been growing between Italy and the European Union over the 2019 budget. Many are wondering whether the colourful dialogue between the European Commission and the Mediterranean country is now really about the size of the deficit or about a deeper discontent that could drive Italy to take exceptional measures against the EU, pos-sibly including a referendum to leave the eco-nomic community.

Finally, in the US we are continuously wit-nessing an overconfident Fed chair in the form of Jerome Powell, who continues to tighten the economy. However, although US interest rates are rising, US corporate spreads continue to trade tight, leaving many to wonder whether this is the next bubble destined to burst.

The fragility and contradictions of the financial market are starting to surface, and although credit spreads will be put under consid-erable stress in the fourth quarter, we believe that we will not see an overwhelming sell-off until the US economy slows and gradually turns into a recession. This should give investors plenty of time to assess their risks and position themselves for a possible downturn in 2019-20. The current market still provides opportunities, especially in the short part of the curve, and investors can use episodes of volatility to enter solid assets at a better price.

EM: Debt bonanza must endFrom the financial crisis of 2008 until today,

emerging markets have taken advantage of low interest rates and yield-deprived investors to issue more and more debt in hard currencies, the majority of which is in US dollars.

Unfortunately, with the USD remaining strong and the Fed continuing to hike interest rates, the EM world is walking a fine line, and the equi-librium can be upset by two main risks: interest rate payments, which are becoming increasingly more complicated as local currencies are quickly devaluing against the USD, and the refinancing of existing debt, which is becoming more and more expensive as interest rates rise in the US, and par-ticularly impacting those countries with a pre-ponderance of short maturities, such as Argentina.

The volatility that hit Argentina and Turkey this past summer is just the beginning. Although the sell-off had two very different causes (a cur-rency crisis in the first case and a political hiccup with the US in the latter), the result was the same: a violent sell-off of the local currency together with sovereign and corporate debt issued by these countries. This implies that regardless of

where pressure is applied (politically or economically),EMs have reached a peak, and now they can only go in one direction: down.

These events were alarming enough, but the most troubling part is that while the local cur-rencies rebounded modestly (but stayed weako-verall reflecting the fragile economic conditions of thesecountries), hard-currency sovereigns saw a robust rebound. This means that investors remain confident that episodes of volatility, such as those experienced over the summer, are fixable isolated cases which represent buying opportunities, and they are putting their faith again into the hands of central banks that for years have propped up asset prices through their enormous balance sheets.

However, we believe it is wrong to assume that the low volatility environment of the past few years will last indefinitely and that the cases of Argentina and Turkey indicate that we might be approaching the end of the late economic cycle where more volatility is to be expected within the EM world.

A possible trade war could aggravate this event as a shift towards anti-globalisation-measures could have serious repercussions for EM growth.

For all these reasons we are cautious towards EM until the end of the year.

ECB ‘tightening lite’ amid political crisisFinally, after years of quantitative easing, we

see European Central Bank president Mario Draghi ready to slowly tighten the economy, con-fident that the euro area is recovering and that the support of the ECB is no longer needed. However, although economically things are better than before, political risks are arising from the same strategy that enabled the EU area to recover: austerity.

Populism in Europe represents a growing opposition to the austerity rules imposed by the European Commission, and this has come to rep-resent the biggest threat to the euro area since the global financial crisis in 2008.

We believe that Q4 will see the performance of European sovereigns put at risk by the demands of the Italian government to the European Commission, which will not only be confined to discussion of the 2019 budget but could even see an escalation of tensions as Italy makes it clear that it is not willing to abide by Brussels’ rules.

Ironically, it is just when the periphery needs the support of the ECB that Draghi is halving the bank’s balance sheet, making movements in European sovereigns more intense. And even when an agreement is eventually reached on the Italian budget for 2019, Italian sovereigns will continue to be volatile as political tension with the EU will remain high.

In addition, if a downgrade from Moody’s arrives at the end of October, then the widening of the spread between Italian BTPS and Bunds could provoke a wider sell-off in Italian corpo-rates and the periphery, more notably Greece and Spain.

Although the Italian government will be a tough cookie to deal with, we believe an ‘Italexit’ is not possible. The Italian economy is highly dependent on the euro area economy, and the single European currency complicates things regarding a possible exit. This makes it impossible for the parties to pursue this without losing the bulk of their voters, who would find themselves in a weaker position than they had while in the EU.

This is why a sell-off in the periphery consti-tutes a risk in the short termbut an opportunity in the longer term. This space could provide inter-esting opportunities for yield-deprived investors as the value of quality bonds falls.

US high yield: Time to exit longer maturities

As you can see from Figure 1, US high-yield spreads have widened the least of any in the investment-grade space and, of course, EM space, making junk bonds the top performers in the fixed-income market since the beginning of year.

This can be explained by a combination of investors’ confidence in the economy together with the fact that high-yield issuance is at its lowest level since 2010. But these are not good enough reason to sit on riskier assets while interest rates are rising, and it is not yet clear how long the strong US economy will last before a recession comes. Just as in EM, here we see debt refinancingas the biggest risk facing weaker cor-porates at the moment.

Although we believe that the risks are not immediate, we think it is time for investors to reconsider their junk bonds exposure.

Current default rates are still below 3% for high-yield credits, and this outlook should not change this year or in H1 of next year, making short-term high-yield corporate bonds still attractive. Bonds with longer maturities are a dif-ferent story. While the remainder of 2018 will be underpinned by solid growth thanks to Trump’s policies, we can expect this to stop sometime next year as rising inflation will require the Fed to raise rates faster, producing a slowdown in the US economy.

We are negative on longer-term, lower-rated bonds, and believe that Q4 represents a perfect opportunity to reduce exposure in these instru-ments as valuations will remain supported by the current economic momentum, while the start of next year should already see a correction in this space (and a higher chance of defaults later in 2019), as Moody’s has indicated in one of its recent reports.

ConclusionWe expect the fixed-income market to stay

volatile this quarter. But as the economic backdrop remains strong along with market sen-timent, we can expect a rebound after various episodes of volatility. This does not mean that this represents an opportunity to enter new risky positions. As the economy moves into the final stages of the late economic cycle, periods of vola-tility are going to be normal before a bigger sell-off occurs. This is why we believe this is the perfect time to monetise riskier positions and re-evaluate current asset allocation.

In the long term, we are negative on EM and US junk bonds because as the US dollar remains strong, the economy is tightening and growth gradually slows, we can expect weaker EM to find themselves in a liquidity trap.

In the short term, we are also negative on sov-ereigns from the periphery which will also remain under stress as political and economic uncertainties arise in Europe. Italy will be a cat-alyst for a possible wider sell-off in this space as tensions remain at historic highs between the Mediterranean country and the EU. In the long term, however, we are positive on selected periphery banks and corporates which are repricing and trading more cheaply than their European counterparts due to the current political instability.

In short, we believe that Q4 is the perfect moment for investors to assess whether their strategy is sustainable in the medium term, and hence to start taking measures to navigate the late economic cycle once it slowly turns into recession.

(The views expressed in this article are the author”s own and do not necessarily reflect the view of The Peninsula)

From the financial crisis of 2008 until today, emerging markets have taken advantage of low

interest rates and yield-deprived investors to issue more and more debt in hard currencies, the majority of which is in US dollar. Unfortunately, with the USD

remaining strong and the Fed continuing to hike interest rates, the EM world is walking a fine line.....

The fragility and contradictions of the financial market are starting to surface,

and although credit spreads will be put under considerable stress in the fourth quarter, we believe that we will not see

an overwhelming sell-off until the US economy slows and

gradually turns into a recession. This should give investors plenty

of time to assess their risks and position themselves for a

possible downturn in 2019-20.

Q4 is the perfect moment for investors to assess whether their strategy is sustainable in the medium term, and hence to start taking measures to navigate the late economic cycle once it slowly turns into recession.

11TUESDAY 11 DECEMBER 2018 banking

Commercial Bank: A great turnaround story

Q. Commercial Bank is a classic case of Qatar banks which made a major turnaround in the post-blockade year. Could you please explain the factors that contributed to the increase in profitability?

A. Commercial Bank has an excellent fran-chise built over 42 years of operations in Qatar. We have a clear vision to improve the Bank’s per-formance based on our five-year strategic plan initiated in 2016. Within that plan, our key areas of focus have been taking provisions for our legacy loan book, reducing our cost to income ratio, and continuing to build the Bank’s franchise in terms of new technology and innovation.

Since 2016, our provisions have come down, we have reduced our cost to income ratio closer to market levels, and launched Commercial Bank Innovation Services as our innovation and tech-nology arm, together with new digital products to the market. These products include contactless cards; e-gifts; an upgraded mobile banking appli-cation; and our 60 seconds digital remittance service to five countries that has been used over one million times by customers since launch last year. All three of these of actions under our five-year strategic plan have improved our bottom line performance.

Q. Explain how did Qatar’s banking sector weather the siege storm?

A. The initial impact of the embargo on the banking system was a withdrawal of liquidity from the blockading countries. The Qatar Central Bank reacted quickly and new public sector deposits outweighed the non-resident with-drawals by several factors.

There were early concerns that non-block-ading countries would also withdraw their deposits, and yet Qatar experienced a strong level of international confidence in the banking system and the economy, especially from Asia. Qatar’s banking system has proved to be resilient backed by strong economic foundations, with double A credit ratings, large sovereign reserves, and an economy demonstrating sustained GDP growth.

Commercial Bank has completed a number of bond issuances since the blockade, including the largest ever Swiss Franc bond from the MENA region, and we have found international investors are convinced in the financial strength of Com-mercial Bank and the Qatari economy. Investor confidence was also clearly demonstrated through Qatar’s sovereign bond issue earlier this year being oversubscribed many times over.

Q. Commercial Bank’s original plan was to cut the real estate exposure. Will you be con-tinuing with your plans to cleaning up your legacy assets?

A.As part of our five-year strategic plan, we took the prudent decision to take provisions for

our legacy loan book. The majority of this provi-sioning process has now been completed, which is translating into improved bottom line per-formance. Separately, we continue to de-risk and re-shape our balance sheet through increased diversification, decreasing our concentration in real estate and increasing our concentration in high quality government and public sector loans.

Q. An update on Commercial Bank’s Five-year Plan.

A. We are now over two years into our five-year strategic plan and the plan’s execution is on track. I am pleased with the teamwork and engagement from staff across the Bank’s different divisions in achieving this.

Q. Commercial Bank’s support to help Qatar realise ambitious Qatar National Vision 2030.

A. At Commercial Bank, we support all four pillars of the Qatar National Vision 2030 through our activities but as one of the largest private-sector employers in Qatar, our focus is in on developing human talent as this is at the core of any country’s future success. We have in-house national talent development programmes to foster the next generation of capable and expert bankers, supplemented by external training.

Q. Commercial Bank’s long-term Outlook for Qatar banking sector. How is Qatar banks’ operating environment going to benefit from the country’s projected higher economic growth. The 2019 Outlook for broader GCC banking sector? Do you think Qatar banks will see a better financial footing in 2019? If yes, why?

A. Qatar’s banking sector is resilient and healthy. Banks in Qatar have good liquidity, asset quality, and strong capital ratios.

Q. Despite margin compression, increased impairment charges and increased funding costs, Qatar’s listed banks recorded an 8 percent growth in H1, 2018. Your expectations for the fourth quarter performance of Qatar banks.

A. We expect to see continued positive per-formance from Commercial Bank and other Qatari banks in 2019.

Q. The technology innovations (invest-

ments) by Commercial BankA. At Commercial Bank we have done some-

thing unique and created a new subsidiary called Commercial Bank Innovation Services (CBIS) as our innovation and technology arm, which forms a core part of our strategic objective to embed digital within the DNA of our organisation and provide world-class digital products and services to our customers.

CBIS gives us the ability to innovate quickly, bring out new products faster, and deploys the latest technologies to our banking operations and platforms in line with our digital visionsuch as straight through processing, robotics and artificial intelligence.

Previously, our operations services were out-sourced to India but we have demonstrated our commitment to the Qatari economy by bringing this function back in-house on Qatari soil through CBIS and creating over 300 new jobs during the blockade. CBIS is a Qatar Financial Centre company and we appreciate their support and efforts in providing a platform for companies coming into Qatar. Finally, CBIS is bringing new technology and innovation to Qatar, which is helping to develop Qatar’s banking industry in line with the economic pillar of the Qatar National Vision.

Q. A brief on foreign operations and foreign subsidiaries

We are a long-term investor in Turkey and we are fortunate to have a strong and experienced management team on the ground at our Turkish subsidiary Alternatif Bank to navigate the current economic volatility. We will continue to invest in Alternatif Bank and as a further demonstration of our commitment, last month we opened their brand-new head office at the Vadistanbul Bulvar complex in Istanbul for 650 employees.

We also have a strategic partnership with the National Bank of Oman (NBO). NBO is Oman’s second largest bank, has a strong capital position, and continues to deliver solid results. Closer strategic ties between Qatar, Turkey and Oman as a result of the ongoing blockade presents opportunities for the Commercial Bank Group to tap into the growing flows of capital, investments, trade and business between Qatar and these two countries. We will continue to focus on improving United Arab Bank, our associate in the UAE, which is currently classified as an asset held for sale.

Commercial Bank set out a turnaround plan in 2016, under its Group Chief Executive Officer JOSEPH ABRAHAM, aimed at stemming the bank’s dismal earnings run as more loans soured. The five-year-plan worked wonders as the bank was able to halt several quarters of falling profits and made a major turnaround in the past couple of quarters. The Commercial Bank and its subsidiaries recorded a significant 386% year-on-year jump in its net profit for the nine months ended September 2018.

Joseph Abraham, a former Australia and New Zealand Banking Group leader, shares the bank’s recovery story with SATISH KANADY as Commercial Bank enters third year of its strategic five-year-plan.

Commercial Bank has an excellent franchise built over 42 years of

operations in Qatar. We have a clear

vision to improve the Bank’s performance

based on our five-year strategic plan initiated

in 2016. Within that plan, our key areas of focus have been

taking provisions for our legacy loan book, reducing our

cost to income ratio, and continuing to

build the Bank’s franchise in terms of new technology and

innovation.

Joseph Abraham Commercial Bank Group CEO

12 TUESDAY 11 DECEMBER 2018banking