(Bloomberg) -- Qatari banks, already stretched by financing demands of the $200 billion 2022 World Cup, took a head-on blow from its neighbors’ abrupt decision to cut economic and diplomatic ties.
At risk are the foreign deposits—especially from the six-nation Gulf Cooperation Council—that have helped sustain institutions like Qatar National Bank QPSC, the region’s largest by assets, and Doha Bank QSC. Lenders in Qatar and across the GCC have already struggled with declining cash reserves and higher interest rates after governments used bank deposits to maintain spending in recent years amid declining oil prices.
Qatar, one of the world’s richest countries and biggest producer of liquefied natural gas, is a global financial powerhouse with holdings in Barclays Plc, Credit Suisse Group AG and Deutsche Bank AG. Still, its domestic banking system relies heavily on foreign cash. Non-resident deposits made up 24 percent of deposits in the country’s 18 lenders in April, according to the central bank. That compares with 1.2 percent in Saudi Arabia and 12 percent in the United Arab Emirates.
“Given the increasing integration with regional counterparts, this hits Qatar and its corporates hard,” said Emad Mostaque, chief investment officer of emerging market hedge fund Capricorn Fund Managers Ltd. “If it lasts more than a few days we are likely to see rapid increases in risk pricing.”
Qatar’s three-month interbank rate fell 8 basis points, or 4.22 percent, on Monday, the most since July, according to data compiled by Bloomberg. The yield on the government’s 2026 bonds jumped 23.6 basis points to 3.4 percent at 2:39 p.m. in Doha, the highest for almost three months. Twelve-month riyal forwards, which investors use to bet against the currency, jumped 73 percent to 350 points, the highest level for four years.
Early Monday, Saudi Arabia, Bahrain, Egypt and the U.A.E. suspended most connections with Qatar, in an unprecedented move designed to punish it for ties with Iran and Islamist groups in the region.
Qatari banks are also seeking to lure money into their coffers to meet a Dec. 31 central bank deadline of matching loans to deposits. The hunt for cash has driven the local inter-bank rate to the region’s highest. Efforts are being undermined because loans are rising faster than in Saudi Arabia and the U.A.E. as Qatar continues spending to finance building projects for the soccer World Cup.
The average loan-to-deposit ratio at Qatari lenders was 111.6 percent as of April. Saudi Arabia’s ratio was 87.4 percent, while it was 99.4 percent in the U.A.E. , according to central bank data.
“Political tension increasing in the region could discourage incremental regional liquidity flowing into the Qatar banking system,” said Sanyalak Manibhandu, head of research at NBAD Securities LLC. “Banking systems in the region are inter-related” and interbank interest rates suggest that the Qatar banking system is less liquid than that in Saudi Arabia and the U.A.E.
Moody’s Investor Service cut Qatar’s credit rating last month by one level to Aa3, the fourth-highest investment grade, citing uncertainty over its economic growth model.
Diplomatic tensions may also undermine Qatar’s regional expansion. QNB received approval to open a branch in Saudi Arabia, though it has yet to start operations in the country, according to the central bank website. The Qatari lender also owns 40 percent of Dubai-based Commercial Bank International PSC.
Qatar’s Commercial Bank QSC has a 40 percent holding in Sharjah’s United Arab Bank PJSC and a 35 percent stake in National Bank of Oman SAOG. Doha Bank also operates a branch in the U.A.E.
Operations are also likely to be hampered. Many bankers commute daily or weekly between Qatar and neighboring Gulf states such as Dubai and Abu Dhabi, which offer more attractive standards of living for expats. With Emirates, Etihad Airways PJSC and FlyDubai set to suspend flights to and from Doha as of Tuesday, travel between countries won’t be possible.
“It’s not as simple as one country being affected by this,” said Simon Quijano-Evans, an emerging-market strategist at London-based Legal & General Investment Management Ltd., which oversees about $1.2 trillion of assets.“Given there are so many vested global interests, if the GCC is not able to work this out among themselves, the risk of spillover will increase for all countries in the region.”
—With assistance from Matthew Martin