Higher interest rates and OPEC oil production cuts will constrain near-term growth prospects for the major Gulf Cooperation Council (GCC) economies, but non-oil growth and, consequently, credit growth in the UAE and Saudi Arabia remain robust, S&P said in the latest report on the GCC banks.
Despite a slight deterioration in asset quality indicators and an increase in the cost of risk, it expects rated GCC banks will report stronger profitability, thanks to higher net interest margins and generally lower-cost business models.
External funding requirements for Qatar and the evolution of available liquidity for Saudi banks are factors to watch out for.
Higher interest rates will reduce GCC banks’ credit growth, but Saudi and UAE banks’ performance will be more resilient, it said. S&P expects higher interest rates will reduce Kuwaiti banks’ credit growth to about 3%, from almost 8% in 2022, and soften Saudi banks’ total lending growth to about 10% in 2023, from 14% in 2022. UAE banks, on the other hand, will benefit from still robust non-oil GDP growth, which will somewhat mitigate the negative effect of higher interest rates on credit growth.
S&P says the UAE banks’ credit growth will improve to approximately 7% in 2023, compared with 5% in 2022. Yet, a long period of higher interest rates and the slowdown of the oil economy could pose challenges. Qatari banks, unlike their GCC peers, will continue to experience a sharper decline in credit growth. This is because the country’s main infrastructure projects, which are a key driver for credit demand through contractors, were completed in time for the 2022 FIFA World Cup.
A slight deterioration in asset quality metrics has been forecast, but the negative effect on banks’ returns will be limited. Higher interest rates have resulted in a steep rise in borrowing costs. According to S&P, the resulting sluggish demand in the rental real estate market will weaken Qatari and Kuwaiti banks’ asset quality metrics. In addition, Qatari banks’ weaker foreign lending exposures will contribute to loan loss charges. Nevertheless, Qatari banks’ robust public sector exposure and Kuwaiti banks’ high provision buffers will contain the adverse effects and limit the increase in nonperforming loan (NPL) ratios.
The UAE will likely report strong non-oil GDP growth of 6% in 2023. This, in combination with recoveries from provisions booked in the past two years, will reduce UAE banks’ credit costs in 2023, compared with 2022. Even though credit costs in the GCC region, with the exception of the UAE, will increase, the agency still expects GCC banks’ return on assets (ROA) will improve in 2023, mainly due to higher margins and still satisfactory, albeit lower, lending growth in some GCC countries.
Also published on Medium.
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