The Banking Executive Magazine - September Issue 2022

GCC Banks GCC BANKS SET FOR POSITIVE EARNINGS ON HIGH OIL PRICE, RATE HIKES – S&P S&P Global Ratings expects prof- itability 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 re- gional 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. 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-pan- demic levels, while Qatari and UAE banks are taking a bit longer to re- cover. However, their strong momentum so far in 2022 may not be enough to shield them from adverse develop- ments 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 Eu- rope and high inflation could mean weaker economic growth, leading to knock-on effects for the banks. For Saudi banks, S&P expects the on- going credit expansion to continue in the remaining months; growing at 15% for the year. "The gradual in- crease in interest rates will continue to feed Saudi banks' margins, even- tually pushing them up by year-end." However, the kingdom, which en- joyed 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 re- cession. Plus, interest rates "could result in a shift away from non-commission- bearing deposits, which may pres- sure 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 sta- bilise 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. the BANKING EXECUTIVE 24 ISSUE 165 SEPTEMBER 2022