S&P: Banks of 4 Gulf countries regain pre-Corona profitability
Standard & Poor’s (S&P) predicted that the profitability of the four largest banking systems in the Gulf Cooperation Council countries – Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates – will reach pre-pandemic levels by the end of 2022, driven by higher oil prices, higher interest returns, and new projects supported by the financial sector.
Higher net interest margins in the second half are likely to offset the higher cost of risk, leaving banks with full-year profits stronger than in 2021, S&P said in a report.
The cost of risk is also likely to stabilize at normal levels this year, in part due to adequate provisioning, but some loans that benefited from the support measures may become non-performing.
“However, Gulf banks face more uncertainty in 2023 amid projected lower oil prices and risks to economic growth in the United States and Europe,” it said.
Saudi banks: stronger profitability
The report said that the financial performance of Saudi banks is almost recovering to pre-coronavirus levels, expecting an average return on assets (ROA) of 2 percent in 2022 compared to 2.1 percent in 2019.
Credit to the private sector expanded by 8.5 percent during the first half, somewhat faster than the agency’s assumptions due to stronger-than-expected mortgage growth.
Coverage of non-performing loans of banks stood at 160 percent – 170 percent in 2022.
Standard expects the momentum of higher credit growth to continue in the second half, and credit growth to reach about 15 percent in 2022.
“The gradual increase in interest rates will continue to feed the margins of Saudi banks, eventually causing them to rise by the end of the year. However, we expect the cost of risk to rise somewhat during the second half to reach 70 basis points – 80 basis points with the reclassification of some loans restructured after the pandemic.
UAE: Non-performing loans contained
The S&P report says that higher interest rates will support the profitability of the banking sector, and that the performance of banks in the first half of 2022 has improved on the back of a lower cost of risk and higher interest rates.
It notes that the Central Bank’s Targeted Economic Support Scheme (TESS) has curbed the increase in non-performing loans. Meanwhile, the macroeconomic environment has begun to improve thanks to the rise in oil prices and the recovery in the non-oil sector.
Also, better operating conditions led to higher lending growth in the first half of 2202 compared to 2021, although this could be mitigated by an increase in interest rates in the second half.
S&P expects the continuation of the trend of high interest rates and low cost of risks to support the profitability of banks.
Qatar: Credit growth slows as World Cup backlog ends
S&P expects private sector credit to grow 5% in 2022, less than half the average rate it has seen over the previous three years.
Consumer lending is likely to see the strongest growth, buoyed by the year-end World Cup and positive sentiment from higher natural gas prices. However, government construction projects – previously the main driver of growth – have mostly been completed, which is evident in the ban–s’ performance in the first half.
“Overall credit could decline slightly if lending to the government continues to decline in the second half, which we see as likely given the projected fiscal surplus of around 12 percent of GDP,” the report states.
Kuwait: High oil prices create a supportive environment
Higher oil prices and an economic recovery supported faster lending growth and a lower cost of risk.
The report attributed the strong profits of banks in Kuwait mainly to a further decrease in the cost of risk and higher lending growth of 9 percent year-on-year in the first half.
“This came at a time when high oil prices supported the country’s economic recovery and improved operating environment…However, higher inflation and the resumption of some costs as the pandemic subsided led to a 10 percent increase in operating costs compared to the first half of 2021, which offset benefits from higher revenue.