The earnings performance of banks in the Gulf Cooperation Council (GCC) will recover almost to pre-pandemic levels in 2022, thanks to the economic recovery, said S&P Global Ratings in a report.
According to a report reviewed by Economy Middle East, S&P expects the cost of risk to return to normalized levels for most countries and higher interest rates to support banks’ bottom lines and foresee no major regional mergers or acquisitions on the horizon.
S&P’s said the outlook for 2023 things looks less certain. The agency sees three main sources of risk:
- The expected slowdown of the global economy could affect the region primarily through commodity prices. S&P forecasts are based on the expectation that the Brent oil price will average just above $100/b for 2022, $85/b for 2023, and $55/b for 2024 and thereafter.
- Banks are being exposed to high-risk countries. A few Gulf banks ventured into higher-risk countries, most notably Turkey and Egypt. Given these two countries’ significant challenges, we anticipate some impact on Gulf banks. In Turkey, for instance, the lira’s depreciation has resulted in significant unrealized losses for the exposed GCC banks. Furthermore, the application of the International Standard on Auditing 29 on financial reporting in high-inflation countries has reached the bottom line for open Gulf banks.”
- Potential liquidity constraints to finance domestic and global liquidity become scarcer. Because of low liquidity and high liquidity costs globally, the proportion of external financing in Qatar, for example, is declining.
Despite these risks, S&P’s outlook bias was firmly positive. The agency indicated that Gulf banks are resilient and that the operating environment is still supportive.
Saudi leads the slight acceleration in lending growth
Based on the data reported by the top 45 GCC banks, lending growth accelerated slightly in first-half 2022 to an annualized 9.5%, compared with 7.8% in 2021, due to greater economic activity and improving sentiment related to high oil prices. Saudi Arabia continued to propel the sample numbers with lending up almost 10% in the first half.
S&P expects corporate lending to contribute to future growth as projects related to Vision 2030 are implemented. It also expects mortgages to continue contributing to growth, although more slowly than in the past couple of years, as the sector matures and increased interest rates reduce demand somewhat.
“Interest rate increases will contribute to weak indicators in 2023,” the firm added, “which partially dampens our expectation that banks will pay close attention to the trade-off between the positive impact on profitability and asset quality deterioration.” We anticipate an increase in NPL ratios under our base case scenario. However, unless the global economic slowdown proves to be more severe than expected, it will not exceed 5% by the end of 2023.”