Counterparty Goals Greg Readings

When there’s a World Cup on, it’s usually time for those writing online content such as this to start dusting off the football metaphors and shoehorning analogies into a light-hearted narrative. Probably something that mentions (investment) goals. I think it’s more than fair to say this hasn’t been a light-hearted tournament, with controversies and questions asked of Qatar’s human rights record, LGBTQ+ stance and the environmental cost of the event, amongst other issues.

The focus this has brought on the OPEC state will have likely raised questions of many organisations and we’ve seen this in the world of cash management investment counterparties. Qatar National Bank (QNB, 50% owned by Qatar’s sovereign wealth fund) has long been a name that pops up on UK brokers’ deposit lists and, along with other major banks in the wider Middle East region, has been seen by many as a reasonable potential counterparty from a creditworthiness perspective. Indeed, non-Qatari deposits accounted for around 42% of the bank’s total deposits as of September 2022. QNB has high credit ratings (Aa3 / A / A-) and its CDS levels are similar to those of other international banks. The rating agencies note strengths which investors would like the sound of: strong profitability, a dominant market position, good capitalisation, strong asset quality, diversified funding and a high likelihood of government support. And it doesn’t hurt if the returns are pretty good, too. But the spotlight the World Cup has shone and the bank’s unsurprising involvement in funding the tournament has raised ethical questions for some treasurers.

It's not a name which has ever featured on Arlingclose’s suggested list of counterparties for our local authority clients. Our assessment and advice have always looked beyond a credit rating or particular CDS level to try to take a rounded view of a of an organisation and the environment they operate in. We sometimes refer to this as our ‘subjective overlay’ and Qatar and its banks never offered robust enough political, regulatory, or legal certainties to provide us with comfort, particularly around reputational risks. Investments are about risk and reward, and this wasn’t one that stacked up for us.

However, even those institutional investors avoiding direct dealings with QNB may have some indirect exposure. Given the credit strengths mentioned earlier, and a need for diversified counterparties looking for short-term funding, some Money Market Funds invest with QNB. Those that do typically keep exposures smaller and shorter compared to other names in their Funds, noting the political risks. It is a mixed picture, though, with some MMFs avoiding Middle Eastern exposure altogether for various governance and social reasons.

Ethical restrictions have not typically featured as part of treasury management strategies, but it’s an area investors are likely to increasingly find themselves navigating, particularly when there is increased public scrutiny of an issue. No counterparty is perfect – far from it when we are talking about institutions such as banks – but an approach to creditworthiness which goes beyond what the basic numbers, ratings and ratios suggest is a solid starting point upon which clients can layer their own values.

Or to put it another way, a solid line of defence provides the base needed to push forward with tactics which achieve plenty of goals. I’ll put the shoehorn down, now.

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