Qatar National Bank (QPSC) is set for profit growth in 2023 and 2024 despite a slowdown in public sector lending ahead of the FIFA World Cup later this year.

High energy prices and strong hydrocarbon-related revenues have prompted Qatar's government to repay some of its debts to domestic banks as infrastructure spending slows ahead of the soccer tournament. This public sector deleveraging is the biggest issue for the country's banks, according to Chiradeep Ghosh, vice president for financial institutions at Bahrain's SICO Bank.

Public sector lending is an important part of Qatari banks' business, with loans to government and related entities making up 31% of total loans in August.

Nevertheless, private sector credit growth has been relatively solid, Ghosh said. The bank also expects stronger loan growth in 2023 than in 2022 on the back of increased demand from the private sector and a lower level of repayment by the government, according to Elena Sanchez-Cabezudo, head of MENA financials and equity research at EFG-Hermes in Dubai.

QNB is expected to report net income of 14.16 billion Qatari riyals for full year 2022, according to S&P Capital IQ mean analyst estimates, followed by 16.54 billion riyals in 2023, a 17% year-over-year increase. Profits are expected to increase further in 2024.

The bank's net interest margin is set to increase to 2.42% in 2022, from 2.19% in 2021, and to further grow to 2.54% in 2023, according to analyst estimates.

QNB, which is 50% owned by Qatar's government, is the largest bank in the Gulf region by assets. It has a large number of subsidiaries in Turkey, where it has 540 branches, and Egypt, where it has 241 branches.

The bank's net profit for the first nine months of 2022 totaled 11 billion Qatari riyals, or about $3 billion, up 7% versus the prior-year period, but below that of the corresponding period of 2019, while loan provisions increased 37.1% to 6.19 billion riyals.

'Extremely conservative'

It is an "extremely conservative" bank that aims to achieve steady earnings growth of between 6% and 8% each year, and any profits above that are set aside as additional provisions, said Sanchez-Cabezudo. That is why provisions have increased this year in spite of a positive macro picture.

Qatar's real gross domestic product is set to expand 5.5% this year, according to estimates from Control Risks Inc., as the liquefied natural gas producer's exports surge 28.5% year over year thanks to high oil and gas prices.

The state had borrowed heavily during the pandemic but tends to borrow less when oil and gas prices are high. As of Aug. 31, public sector borrowing was 362.6 billion riyals, down 10.8% from a year earlier, while private sector credit was up 6.6% to 791.1 billion riyals over the same period.

Qatar's private sector credit will expand 5% in 2022, which is less than half the annual average in the preceding three years, S&P Global Ratings forecast in a September research note. QNB expects better loan growth in 2023 than in 2022, which will most likely be flat by year-end, said Sanchez-Cabezudo.

"Next year, the bank is looking at mid-single-digit loan growth, assuming there will be increased credit demand from the private sector and a slightly lower level of repayment by the government. Once the World Cup is over, the government will start new infrastructure projects," said Sanchez-Cabezudo.

Qatar has spent $350 billion on infrastructure ahead of hosting the 2022 World Cup, according to estimates by Al Rayan Investment.

"The government fast-forwarded medium-term infrastructure spending plans — many new projects and capacity expansion originally planned to complete by the end of the decade are now done," said Akber Khan, senior director of asset management at Al Rayan Investment in Doha. "That turbo-charged the balance sheet growth of the banking sector over the last decade."

Tourist spending will surge during the World Cup, but that will have little impact on banks aside from some increase in fee income, said Sanchez-Cabezudo.

The Qatari banking sector's nonperforming loan ratio will likely rise 400 basis points to about 3.6% in 2022, driven by high inflation in Turkey and Egypt, S&P Global Ratings predicts. QNB's is lower than average, at 2.50% at June-end.

International operations

Of QNB's loan book, 78.1% is domestic, with 8.4% and 5.1% from its Turkish and Egyptian subsidiaries, respectively.

Its international operations generated revenue of 12.09 billion riyals in the first nine months of 2022, up from 7.87 billion riyals a year earlier. Yet profit fell to 1.95 billion riyals from 2.19 billion riyals over the same period.

"The profit drop is because QNB is building provision buffers at its foreign units," said Sanchez-Cabezudo. "The bank could have reported sizable profit growth for its international business in riyal terms, despite the impact of foreign currency depreciation, but it prefers to be more cautious."

QNB's Turkish subsidiary, QNB Finansbank AS, reported a 130% year-over-year rise in nine-month profit to 6.1 billion lira, although in dollar terms the increase was just 1% due to a further lira slump this year.

Finansbank's net interest margin rose 417 bps year over year while its nonperforming loan ratio almost halved to 2.1% over the same period. QNB, like other Turkish banks, invests in government debt that pays interest at rates linked to inflation. Turkish inflation hit a 24-year high of 83.5% in September.

"Asset quality has drastically improved in Turkey, because hyperinflation has lowered the real value of earlier borrowings, so people are clearing their older debt," said Ghosh. "Finansbank is still a good asset. It's a strong business, and Turkey's demographics are very favorable; it's just the currency devaluation and inflation that are problematic."

QNB's Egyptian subsidiary's nine-month profit was 6.5 billion Egyptian pounds, up 23% year over year, while its assets grew 33% over the same period to 448.1 billion pounds. In dollar terms, its assets expanded only 7% and its profit increase was 23% due to the strong dollar.

As of Nov. 1, US$1 was equivalent to 3.64 Qatari riyals, 18.60 Turkish lira and 24.20 Egyptian pounds.