Fitch: The Qatar banking system continues to improve but challenges remain

However, challenges are likely to arise from rapid loan growth, efforts to reduce concentrations and exposures to potentially volatile regional property and stock markets.

Qatari banks continue to show strong profitability, healthy asset quality and good capital adequacy ratios. This picture is unlikely to change significantly in the short-term given the current benign regional conditions. The banking system's development has also benefited from the regulator's efforts to maintain a stable operating environment. The Qatar Central Bank (QCB) was the second regulator in the region to implement Basel II and has taken several measures to try to control lending growth.

Fitch also notes Qatari banks' gradual shift from their traditional public sector/government and large corporate lending business to the more profitable, but riskier, medium-sized businesses and retail sector. Despite the small Qatari population, private and retail banking are attractive segments given the vast amount of wealth in the country. Retail lending is still underdeveloped in Qatar, however, and an adverse impact on asset quality cannot be excluded as the banks' retail loan portfolios season. Despite this, Qatari banks have so far maintained satisfactory asset quality ratios. Good impairment allowances and sound capitalisation should help, if and when deterioration in asset quality occurs.

In addition, concerns about volatility in regional stock markets, a possible regional property market bubble and political instability in the Middle East continue to have the potential to negatively affect performance. Margin pressure is likely to arise from intensifying local competition, as well as competition from foreign banks in the wholesale sector. Market and operational risks are fairly limited for the Qatari banking system. Current international credit market conditions have not had any significant impact on any of the Qatari banks.

The QCB supervises 16 commercial banks including three Islamic banks and seven foreign banks operating in the domestic market. The structure of the banking sector is unlikely to change dramatically in the medium-term, as banks are in good financial health and stock market valuations are relatively high. The largest bank in the sector remains Qatar National Bank (QNB; rated 'A+'/Outlook Stable), but its market share has been gradually falling in recent years, as its peers are catching up through more aggressive growth. Offshore branches of foreign banks have substantially increased following the establishment of the Qatar Financial Centre. Foreign banks will compete primarily in corporate, investment and private banking and asset management.