The Qatar Central Bank had increased its key policy rate by 100 basis points (bps), or one percentage point, in 2018 following the hike in policy rate by the US Federal Reserve four times last year.
The increase in QCB policy rate had its share of impact on the interest rate on both deposit as well as credit, the QCB said in its 10th Financial Stability Review.
The interest rate on deposit declined marginally in the shorter end (except for one-month maturity) while in the medium to longer end, it increased in the range of 35bps to 65bps, the QCB said.
The banking sector’s preference for more of longer-term maturity over shorter maturity might have been one of the reasons for this change.
However, the interest rate for one-month maturity showed the highest increase in the range of 20bps to 75bps.
The impact of change in interest rate on credit was mixed for the various maturity bucket.
Interest rate for overdraft increased by 30bps towards the end of the year while the rate for bill discounted increased 73bps.
At the same time, interest rate for three-year maturity decreased, while it increased by 6bps for above three-year maturity.
Re-pricing of deposit and credit resulted in higher average cost of deposit by 47 basis points, while the average returns on credit increased by 49bps.
Accordingly, the interest spread increased in the current year but a at power percent points compared to the previous year, the QCB said.
Since banks have surplus funds at shorter end of the maturity ladder, an increase in interest rate is expected to have a negative impact on profitability due to faster repricing of liabilities compared to assets in case of a parallel shift adopted by the banks.
However, the QCB noted the banking sector appears to have suitability adjusted their interest rate so that the change in spread remains positive. A positive change in spread ensures the net interest income to grow, and thereby profitability.
Nonetheless, given the high loan-to-deposit ratio and the banking sector’s requirements to improve the share of stable resources in its funding mix, banks might incentivise customers to improve their deposit base in the long run. This, in turn, might squeeze the interest spread, with an associated impact on profitability. In order to examine the impact of an adverse movement in interest rates, the earnings at risk (EAR) exercise has been conducted.
For a 100bps increase in interest rates, at the aggregate level, net interest income (NII) of banks was found to decline by QR0.9bn, the QCB said.
“Thus, the impact is significantly lower than the estimated decline calibrated during 2017,” the Financial Stability Review showed.
The increase in QCB policy rate had its share of impact on the interest rate on both deposit as well as credit, the central bank said in its 10th Financial Stability Review.
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