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. 

 

Banks are also getting a boost from high oil prices, improving confidence, and for some countries – specifically Saudi Arabia – large government-sponsored projects. 

 

S&P expects Bahrain's economic recovery to continue in 2022 because of higher oil prices and increasing regional economic activity. Further deterioration in banks' asset-quality indicators will remain contained as the economy recovers. 

 

Although its contribution to the overall funding profile is moderate, external debt could prove vulnerable to domestic or regional stresses. A mitigating factor is that a large portion of the banking sector's external funding is from GCC countries and likely to remain stable, assuming no domestic or regional stresses.

 

Cost of risk

S&P expects cost of risk to return to normalised levels for most countries and higher interest rates to support banks' bottom lines and foresee no major regional mergers or acquisitions on the horizon.

 

But things look less certain for 2023. S&P sees three main sources of risk -- the expected slowdown of the global economy, which could affect the region primarily through commodity prices; banks' exposure to riskier countries; and potential liquidity constraints to fund growth as local and global liquidity becomes less abundant.

 

"Despite these risks, at October 15, 2022, our outlook bias was firmly positive, with about 35% of ratings carrying positive outlooks either for potential improvement in their respective sovereign's creditworthiness or idiosyncratic reasons," said S&P Global Ratings credit analyst Mohamed Damak in the report, entitled "GCC Banks Will Enter an Uncertain 2023 On Solid Footing."

 

Risks are increasing

The remaining 65% of ratings had a stable outlook, mirroring banks' expected resilience and still-supportive operating environment. "Nevertheless, risks to global and local economic prospects are increasing," Damak added.

 

Based on the data reported by the top 45 GCC banks, lending growth accelerated slightly in first-half 2022 to an annualised 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 reduces demand somewhat.

 

Lending growth muted in Qatar

Lending growth remained muted in Qatar as projects related to the World Cup have been delivered and no significant new projects are being launched for now. S&P expects to see some lending growth for working capital and consumption in 2022. Lending will accelerate slightly from 2023 as investment resume. 

 

For Kuwait, S&P expects to see accelerated lending growth from stronger economic growth and investment from the government. For the UAE, lending growth has sped up thanks to improving sentiment. In 2023-2024, S&P expects to see slower overall lending growth in the region from the expected slowdown in economic growth.

 

For Oman real GDP growth recovered in 2022, but S&P expects another slowdown in 2023-2025 via a drop in oil prices. While we expect the recovery to reach some sectors, others like the construction, hospitality, and transportation sectors are likely to remain under pressure and contribute to banks' asset-quality deterioration. Banks continue to rely heavily on public sector deposits, but S&P views positively their relative stability over a full economic cycle.-- TradeArabia News Service