S&P Global Ratings expects profitability for banks across Kuwait, Saudi Arabia, Qatar, and the UAE to almost reach pre-pandemic levels by year-end 2022, spurred by high oil prices, interest rate hikes, and new public-sector-backed projects.
"In the second half, we forecast a more visible strengthening of regional banks' interest margins and a manageable pick-up in cost of risk, amid lingering effects from the COVID-19 pandemic via loans that benefited from support measures and were then restructured. Combined, these factors will be a net positive for banks' earnings," credit analyst Zeina Nasreddine said in a new report on Thursday.
Gulf central banks raised their key interest rates on Wednesday after the U.S. Federal Reserve delivered its third consecutive 75bps hike.
According to S&P, in the first half, Kuwaiti and Saudi banks showed the strongest performance, with earnings already almost reaching pre-pandemic levels, while Qatari and UAE banks are taking a bit longer to recover.
However, their strong momentum so far in 2022 may not be enough to shield them from adverse developments in 2023 as oil prices are likely to average $85 per barrel (/bbl) next year compared with $100/bbl for the remainder of 2022, it said. Moreover, increased chance of a U.S. recession, escalating geopolitical risks in Europe and high inflation could mean weaker economic growth, leading to knock-on effects for the banks.
For Saudi banks, S&P expects the ongoing credit expansion to continue in the remaining months; growing at 15% for the year. "The gradual increase in interest rates will continue to feed Saudi banks' margins, eventually pushing them up by year-end."
However, the kingdom, which enjoyed the dual benefits of a rebound in oil production and oil prices, could see the operating environment come under pressure if the oil prices fall due to the increasing risk of recession.
Plus, interest rates "could result in a shift away from non-commission-bearing deposits, which may pressure banks' margins."
Higher rates and lower cost of risk will support profitability of UAE banks in a backdrop of improving macroeconomic environment thanks to higher oil prices and recovery in the non-oil sector.
Asset quality is also expected to stabilise as the economy improves and corporate activity recovers.
On June 30, 2022, Stage 3 loans as a percentage of gross loans stood at 5.6%, compared with 6.1% at year-end 2021. Stage 2 loans stood at 6.0% for the first half, the report said.
(Reporting by Brinda Darasha; editing by Daniel Luiz)