Satyendra Pathak
Doha
Qatari banks should remain profitable and benefit from strong capitalisation and adequate liquidity in 2025, with an only modest drop in net interest margins owing to interest rate cuts, said S&P Global Ratings in its report "Qatar Banking Sector 2025 Outlook: Resilient Performance To Continue,” published on Thursday.
According to the report, the Qatari banking sector enters 2025 poised for resilience, supported by robust capitalisation, adequate liquidity, and the government’s unwavering backing. Despite a modest dip in profitability due to anticipated interest rate cuts, the sector remains well-positioned to navigate emerging challenges and capitalize on opportunities presented by Qatar’s expanding liquefied natural gas (LNG) production anddiversification efforts.
Qatari banks are projected to sustain profitability in 2025, although moderation is expected due to declining net interest margins. With the US Federal Reserve forecasted to reduce rates by 175 basis points (bps) by the end of 2025, Qatar Central Bank (QCB) will likely follow suit, given the riyal’s peg to the US dollar. The resulting lower rates, combined with a shift from external to costlier local funding sources, will place slight pressure on banks’ margins.
Despite these challenges, the cost of risk is expected to decrease, aided by an improving economic environment, lower rates, and previous precautionary provisions. As a result, profitability will remain stable in the near term, albeit at slightly moderated levels compared to recent years.
Qatar’s banking system is underpinned by strong capitalisation. The sector’s total capital adequacy ratio (CAR) and Tier 1 ratio comfortably exceed the central bank’s minimum requirements of 12.5 percent and 10.5 percent, respectively.
Shareholder support, conservative dividend payouts (below 50 percent), and robust earnings are expected to maintain these levels in 2025. This ensures that Qatari banks remain well-prepared to withstand potential shocks and continue lending even in challenging economic scenarios.
Credit growth in Qatar is set to decelerate, the report said adding "This reflects a broader slowdown in economic activity and reduced credit demand following the completion of major infrastructure projects. Domestic credit growth is forecasted at approximately 5 percent in 2025-2026, down from the 11 percent average witnessed during 2019-2022.”
Local funding sources are anticipated to play a more prominent role in financing credit expansion, with domestic deposits already showing a 5 percent increase in the first nine months of 2024.
This shift is in line with Qatar’s reduced dependence on external debt as major projects conclude. External debt remains substantial, accounting for about one-third of domestic credit, but the government’s supportive stance mitigates risks of capital outflows, particularly in the event of heightened geopolitical tensions.
The Qatari banking sector faces elevated leverage, with nearly 40 percent of domestic credit tied to high-risk and cyclical sectors such as real estate and related services. Real estate oversupply and downward pressure on property prices may result in stage 2 loans migrating to nonperforming loans (NPLs) for some midsize banks.
NPLs are projected to remain modestly elevated at around 4 percent in 2025 but are expected to improve in 2026 as LNG production increases and lending opportunities expand. The government’s tourism and non-oil diversification initiatives, coupled with interest rate cuts, will help stabilize asset quality despiteongoing risks.
Qatar’s macroeconomic conditions are forecasted to remain broadly stable, underpinned by growth in LNG production and its spillover effects on the non-hydrocarbon economy. The North Field Expansion project is expected to boost LNG output by 35 percent by 2027, driving GDP growth to an average of 5.8 percent in 2026-2027, compared to 2 percent in2024-2025.
Geopolitical tensions in the Middle East remain high, but a full-scale regional conflict is not anticipated. The government’s track record of supporting the banking sector provides reassurance against potentialexternal shocks.
While slower public sector deleveraging will provide additional opportunities for local funding to support credit growth, banks must navigate risks posed by high exposure to cyclical sectors and potential geopolitical uncertainties. The continued stabilisation of external debt and a robust macroeconomic backdrop will be crucial in maintaining the sector’s resilience.
The Qatari government’s proactive approach, combined with the banking sector’s strong capitalisation and liquidity buffers, positions the industry to weather short-term headwinds while capitalising on long-term growth opportunities, particularly those linked to LNG expansion and economic diversification.