Qatar's bank rescue success

A year has passed since the Qatar Central Bank (QCB) was forced to rescue the Al-Ahli Bank of Qatar after it ran up losses of more than $25 million. Since then, QCB has been virtually running Al-Ahli, sweeping away old management, propping the bank up with financial guarantees and appointing a small army of international consultants to sort out the mess.
The QCB has been roundly applauded for its efforts - without its intervention, Al-Ahli may well have gone under. But a string of questions remain to be answered. What are the bank's prospects after a year of restructuring? How did it get into such dire straits in the first place? And what are the implications for the wider Qatari banking sector?
Track records. Al-Ahli's new management team, while acknowledging its troubles, is certainly bullish about the bank's prospects. "There are problems, but the problems are being dealt with," insists new general manager Qasim Mohammed Qasim. Qasim boasts an impressive track record in Middle East banking, and is said to have been handpicked by QCB governor Abdullah Bin Khalid al-Attiya. Under those circumstances, it is hardly surprising that al-Attiyah shares Qasim's optimism.
"The financial performance of Al-Ahli Bank of Qatar is improving and it is healing," al-Attiyah said earlier this year. "The central bank is prepared to give assistance and we are evaluating the situation." There are some solid grounds for this optimism. Central bank intervention successfully prevented a run on the bank and Al-Ahli is now off the critical list - albeit with a reduced asset base. Furthermore, officials claim the bank is already beginning to recover some bad loans.
These efforts have won praise within the Middle East banking community. "The new management team has been very busy trying to fill new management posts," says Andy Ioannou, an analyst with ratings agency Capital Intelligence (CI) in Cyprus. "They have been drawing up internal control mechanisms with the help of outside consultants and speeding up the recovery of non-performing loans, which formed over 50 percent of the loan portfolio." However, doubts remain about whether such action is enough to transform Al-Ahli into a genuinely successful institution. "Al-Ahli's strengths for the moment lie in the support it enjoys from the authorities," says Ioannou. "Over the medium term, the bank's prospects are not looking very bright. It must re-establish its presence in an increasingly competitive market."
One move that appears to have been ruled out - at least in the short term - is a merger. Since the problems at the bank surfaced, speculation quickly mounted that Al-Ahli might be taken over by a larger, stronger rival. But central bank governor al-Attiyah has since poured cold water on those rumors. "We must think of activating competition between banks instead of encouraging a big bank to control other banks."
Big mistakes. Foremost in the mind of the new management team is preventing a repetition of the mistakes that caused Al-Ahli's problems in the first place. And that has inevitably led to a detailed analysis of what went wrong. The bank's difficulties date back to the late 1990s, when oil prices hit $10 per barrel. The government was forced to slash public spending in the face of budget deficits. The government is the engine that drives the overall Qatari economy, so its frugal approach meant work dried up for a number of Qatari companies, particularly contractors. This in turn led to a build-up of non-performing loans in portfolios across the banking sector - the Mannai Corporation, one of Qatar's biggest companies, fell victim to the downturn, leaving a host of banks exposed to its debt default. But while others took the hit on the chin, Al-Ahli's problems ran much deeper.
"Al-Ahli has historically been running into problems," says Ioannou. "Some of these problems stemmed from shareholder interference in the day-to-day functioning of the bank, which led to frequent changes at the top management level." Furthermore, the bank was involved in high-risk margin lending - extending loans to customers who used the funds to speculate.
"The bank was engaged in extensive margin lending," adds Ioannou. "A poorly performing local stock market, and sharp movements in international markets during 2000, saw a sizeable proportion of this type of lending turn bad." The problems were compounded when the bank started offering generous interest rates to depositors, at far higher levels than those offered by other banks in the market.
For all these reasons, Al-Ahli faced huge losses of 102 million Qatari rials ($28 million) - a significant sum for a small bank such as Al-Ahli. Provisions for loan losses, bad debt write-offs and provisions for the fall in the value of investments reached $38 million. The loss was covered by reserves, but this led to a 35 percent fall in the bank's net worth, to little more than $50 million. Such poor performance undermined confidence in the bank and there were fears that depositors would withdraw funds en masse. To avert this, QCB signed a $28 million guarantee agreement to cover any potential "black holes" in the bank's accounts. "If the central bank had failed to intervene, Al-Ahli bank might have gone into receivership," says Ioannou. "Confidence in the local market and in the authorities would have been lost which might have led to political repercussions."
For the time being, al-Attiyah's emergency surgery appears to have worked, and Al-Ahli is off the critical list. But what are the wider implications for the Qatari banking community? Most bankers agree that the incident will have a lasting legacy that will be felt throughout the Qatari banking industry.
The entire sector suffered under the non-performing loan fallout from the late 1990s, and the central bank has already responded by insisting that all banks be more honest about revealing bad debts, rather than concealing them on their balance sheets as assets. "Responsibility lies with management and board members to reveal the extent of their exposure and the quality of their loan assets," says central bank governor Al-Attiya. "There is too much name and face lending." This approach has been welcomed by analysts. "The separation of the management of the banks from their owners is crucial to strengthen their independence and transparent functioning," says CI's Ioannou.
Early indicators suggest this new medicine is working. The central bank's tough approach led most Qatari banks to report a fall in profits for 2000, but the sector showed signs of recovery in 2001 as the government finally began spending its oil revenues following the sharp rebound of crude prices since mid-1999.
Perhaps most important of all, Qatari banks are realizing that they now operate in a very different world to the one that existed before the incident. Qatar has moved from being a country with low liquidity to one with surplus liquidity, and that will force banks to adjust their strategies. "Qatar has transformed itself from being a recipient of capital into a generator of capital," says Ioannou. "If Al-Ahli is to survive, it will need to place more emphasis on trade finance and off balance sheet activities, in particular treasury and asset management. Once Al-Ahli is restructured it will find itself operating within a totally different environment."