Banks in the Gulf Cooperation Council (GCC) banks are set to benefit from a regional economic recovery this year amid higher oil prices, supportive government spending, and normalizing non-oil activity, S&P Global Ratings said in a new report.

"We expect banks' asset quality indicators to deteriorate only slightly as regulatory forbearance measures have helped the corporate sector to deal with the negative effects of the pandemic," said S&P Global Ratings credit analyst Mohamed Damak.

Bahrain and the UAE are the only two countries where nominal GDP at year-end 2022 will remain slightly lower than 2019, due to the weight of the hospitality and real estate sectors in their economies.

However, lending growth in UAE while sluggish, is expected to pick up as economic sentiment improves.

The ratings agency expects Brent oil price to average at $65 per barrel in 2022.

Meanwhile non-performing loan ratio will rise in the next 12-24 months without exceeding 5 percent, compared with 3.7 percent on September 30, 2021.

Rate hikes, funding

GCC banks should benefit from policy rate hikes in 2022 by the US Federal Reserve, which will prompt a similar reaction from GCC central banks given their currency pegs. "On average, a 100-basis-point (bps) increase in rates would result in a 14 percent increase in earnings and 1 percent capital accretion," the report said.

However, external funding might become scarce and more expensive and asset quality indicators could be impacted in case of a faster than expected increase in rates, it added.

Lower global liquidity is likely to have a limited impact on GCC banks thanks to their strong net external asset positions or limited net external debt positions.

Qatar is more vulnerable than other countries due to its large and expanding net external debt position but there are some mitigants. "Moreover, strong capitalization and government support will continue to reinforce regional banks' creditworthiness," said Damak.

(Writing by Brinda Darasha; editing by Seban Scaria)

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