After a strong first half, Gulf Cooperation Council banks are returning to form. S&P Global Ratings expects that earnings for most GCC banks will reach almost pre-pandemic levels by year-end 2022, amid high oil prices and rising interest rates, supporting their creditworthiness.
In the second half, S&P forecasts 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.
In the first half, margins slightly improved in most systems as banks progressively repriced assets and liabilities. Among the four largest GCC markets, Kuwaiti and Saudi banks showed the strongest performance, with earnings already almost reaching pre-pandemic levels, while Qatari and United Arab Emirates (UAE) banks are taking a bit longer to recover.
The agency says the UAE banks’ performance improved in first-half 2022 on the back of lower cost of risk and higher interest rates. The Central Bank of the UAE (CBUAE)’s COVID-19-related targeted economic support scheme (TESS) helped the system through a period of stress, limiting the increase in NPLs.
At the same time, the macroeconomic environment has started to improve thanks to higher oil prices and recovery in the non-oil sector. Better operating conditions led to higher lending growth in first-half 2202 compared with 2021, although this could be tempered by increasing interest rates in the second half. We expect the trend of higher interest rates and lower cost of risk to continue supporting banks’ profitability.
Also published on Medium.
