Friday, November 10, 2017

Review of QCB Data on Net Foreign Assets Position of Qatar Banking Sector - Part 2

Hope You're Enjoying the Deep End of the Pool 
Hold Your Breath There's a Lot More to Come
Earlier posts here and here..

FOREIGN ASSETS

Before we dive deeper, a reminder that there are foreign assets that can offset foreign liabilities. 

The question is how much of an offset and when they will be available to offset.


Qatar Commercial Banks
TFA as Percent of TA
EOP
TFA
TA
NFA
Dec-16 273 1,272 21%
May-17 268 1,323 20%
Jun-17 260 1,316 20%
Jul-17 249 1,313 19%
Aug-17 235 1,328 18%
Sep-17 234 1,347 17%


What are the FA composed of?


Qatar Commercial Banks FA
Billions of QAR
Dec-16
Sep-17
Net Chg
USD
Cash
2
4
3
$1
DFB
115
71
-44
-$12
Credit 
95
95
-1
$0
Invest
59
61
3
$1
Other 
4
4
0
$0
Total
274
234
-39
-$11


  1. As expected Qatari banks have drawn down the most liquid portion of their foreign assets, DFB (Due from Banks).  Credit (Loans) and Investments are less easy to liquidate and typically earn higher returns which would make them resources of last choice. 
  2. A key question is how much more room there is to reduce DFB.  We’ll look at that below. 
  3. Note highly liquid FA are some 32% of TFA as of September.  If other FA cannot be liquidated quickly, that would make the adjusted NFA position a deficit of USD 81 billion equivalent.
Who owns these assets?

Looking at Tables 21 and 22 (MMB) or Tables 22 and 23 (QSB), we see that foreign banks operating in Qatar have a negligible share of FA and FL, roughly 1%-2%.  If you’re wondering, the non-Arab foreign banks hold the bulk of FA and FL in this category. That means the burden of NFA falls on Qatari banks.  For ease of computation I have used the TFA and TFL as reported by the QCB to analyze local banks’ NFA, ignoring the de minimis position of foreign banks.


Qatar Banking Sector  - NFA
Billions of QAR
As of 31 December 2016
FA
FL
NFA
Qatar Banks
269
441
(172)
Foreign
5
6
(1)
Total
274
447
(173)
As of 30 September 2017
FA
FL
NFA
Qatar Banks
231 361 (130)
Foreign
3 7 (3)
Total
234 368 (133)

Turning to the domestic banking sector, we see that commercial banks hold the bulk of FA and are responsible for the bulk of FL.  No surprise here, QNB dominates the banking scene, especially in cross-border activity.  Also it appears that the reduction in the overall NFA has been concentrated in the “traditional” banking sector.  Also notice that while the "Islamic" banks have reduced FA and FL, their NFA position has not improved. Of course, QAR 24 billion (USD 6.3 billion) is rather small change indeed for the GOC


Billions of QAR
As of 31 December 2016
FA
FL
NFA
Traditional
228
378
(150)
Islamic
41
64
(23)
QDB
0
0
0
Total
269
441
(172)
As of 30 September 2017
FA
FL
NFA
Traditional
202
308
(106)
Islamic
29
53
(24)
QDB
0
0
0
Total
231
361
(130)


Who owes the Qatari banks? 
Or in other words, where are the obligors?  That’s important for a couple of reasons. First, such information might give an insight into the creditworthiness of these obligors which would in turn help frame estimates of liquidity of FA. If we find that FA are concentrated in one region, then this may have implications for the banks' ongoing business.  If a substantial portion of FA are in other GCC states, then assuming no resolution to the crisis, this business may be ultimately lost to Qatari banks.  As well regional FA concentrations might well make Qatar vulnerable to actions to obstruct the realization of the proceeds of those assets.   Unfortunately, QCB data doesn’t include that information.
However, there is information in the QCB’s Banks Monthly Statements (BMS) reports on deposit transactions between Qatari banks and their overseas offices.  As outlined above, foreign banks operating in Qatar have a minuscule share of foreign assets and liabilities.  So we can ignore their positions and can use the totals here as proxies for the local Qatari banks’ position.  This will be particularly important in looking at foreign liabilities as outlined below.

Qatar Commercial Banks Foreign DFB
Billions of QAR
EOP
DFB
InterBr
% DFB
Dec-16
114
32
28%
May-17
102
34
33%
Jun-17
94
34
36%
Jul-17
84
37
44%
Aug-17
71
36
52%
Sep-17
71
35
50%


  1. FA “Due from Banks” (DFB) held with overseas branches (InterBr) have increased slightly from December in amount and now account for more than 50% of all FA DFB. 
  2. That suggests that there is little room further extensive reductions in foreign asset DFB. The reasons are twofold:  regulatory and business.  Qatari banks will need to maintain foreign asset liquidity to meet prudential ratios.  Withdrawing funds from overseas branches would likely constrain those entities' ability to conduct operations.

FOREIGN LIABILITIES
As noted earlier, the Qatari banks contractually owe the total amount of foreign liabilities not the NFA (net foreign assets) position. 
What are the foreign liabilities?
Qatar Commercial Banks FL
Billions of QAR
Dec-16
Sep-17
Net Chg
USD
NRCD
183
143
-40
-$11
Banks
208
169
-39
-$11
Debt
49
51
2
$1
Other
6
4
-2
-$1
Total
447
368
-79
-$22



  1. Almost 90% of FL is in Non-Resident Customer Deposits (“NRCD”) and Due to Banks (“DTB”). Liabilities one would expect to have relatively short tenors.  This illustrates the vulnerability.  As seen above, some 32% of FA are liquid, while some 90% of FL are liquid.  So there is a fundamental “maturity transformation” mismatch.  Beyond that don’t forget that FL (QAR 368 billion) are some QAR 133 billion greater than FA. 
  2. Note that NRCD have proven to be as volatile as DTB. 
  3. What’s interesting is that NRCD withdrawals been concentrated in private sector deposits.  Foreign non-financial corporate and public sector deposits have been much more stable, though as per QCB’s MBS report these are primarily time deposits.  Thus, it may be that these non-private sector depositors are contractually unable to withdraw funds at present. If this is correct and these depositors want to exit, then withdrawals may accelerate in these categories, particularly if depositors are from the GCC 3+1.
  4. Two data points (August and September) are not necessarily an irreversible trend, but the pace of withdrawals has slowed. Only USD 1.7 billion in NRCD were withdrawn in September, of which USD 1.4 billion were private sector deposits, USD 0.2 billion in non-bank financial institution deposits, and  USD 0.1 billion in public sector deposits. 
  5. DTBs roughly held steady.  New deposits by overseas branches of roughly USD 0.742 billion partially offset withdrawals of USD 0.824 billion by other banks. 
  6. Tracking future developments in these liabilities will give us the best insight into the extent of capital flight in the Qatari banking sector.  QCB BMS reports are available monthly with a lag.
Who are the providers of funding?
As noted above, QCB released data doesn’t provide a geographical allocation of liabilities. 
But there is mirror data on transactions with overseas branches.
Qatar Commercial Banks Foreign DTB
Billions of QAR

DTB
InterBr
% DTB
Dec-16
208
87
42%
May-17
235
122
52%
Jun-17
193
90
47%
Jul-17
180
76
42%
Aug-17
170
62
37%
Sep-17
170
65
38%

  1. Qatar banks have substantial liabilities to their overseas branches.    
  2. Surprisingly, repayment of DTBs has been primarily in intrabank deposits, that is, to overseas branches of Qatari banks. 
  3. From December 2016 to September 2017, Qatari banks have repaid deposits to their overseas branches of some QAR 22 billion (58% of all repayments) and from May to September, QAR 57 billion (88%).   Presumably, this reflects funding pressure on these branches rather than those branches making adverse decisions on the creditworthiness of their parents. 
  4. September marked a change as overseas branches deposited QAR 3 billion (USD 0.742 billion) while other foreign banks withdrew a slightly larger amount equivalent to USD 0.824 billion.
  5. Surprisingly, other DTBs have shown less volatility. This is perhaps because QNB operates major treasury and trading centers outside of Qatar.  And, thus, overseas branch reduction of DTBs is an indirect reflection of creditor flight at those branches. 

At this point, we have taken our “diagnosis” as far as we can with QCB publicly available data.

What further information do we still need? 
  1. A geographical allocation of FA and FL. 
  2. Disaggregation of the aggregate NFA position to identify the positions of individual banks.  Which banks are most at risk?  Which banks have positive NFA and which negative NFA?  This is important because it is unlikely that NFA-positive banks are going to liquidate assets to support NFA-negative banks.      
I'll cover that in a series of posts to follow.