Higher oil prices, supportive government spending and increasing non-oil activity will boost GCC banks’ growth.
Banks in the Gulf Co-operation Council area will benefit from a regional economic recovery this year, according to S&P Global Ratings.
Higher oil prices, supportive government spending and normalising non-oil activity will boost regional banks’ growth, the ratings agency said in its latest report GCC Banking Sector Outlook: On the Recovery Path in 2022 released on Tuesday.
Strong capitalisation and government support will continue to reinforce lenders’ creditworthiness, it said.
The ratings agency, which expects Brent crude’s price to average $65 a barrel this year, said improving economic sentiment and higher hydrocarbon production should lead to accelerated economic growth.
“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,” S&P Global Ratings credit analyst Mohamed Damak said.
Like their global peers, GCC banks faced tougher operating conditions as the pandemic disrupted economic momentum. However, the regional economies, especially the UAE and Saudi Arabia, the Arab world’s biggest economies, bounced back strongly on the back of mass inoculation programmes and fiscal measures.
The GCC banks are also positively geared to the rising interest rates, the New York-based agency said.
In a tight job market, accelerated inflation readings over the past few months and increasingly hawkish forward guidance from the US Federal Reserve, S&P expects three rate rises in 2022, with the first in May.
“This will prompt a similar reaction from GCC central banks given their currency pegs … [however] banks will benefit from such an increase assuming no material impact on asset quality,” Mr Damak said.
“On average, a 100-basis-point increase in rates would result in a 14 per cent increase in earnings and 1 per cent capital accretion … we do not expect a major slowdown in lending growth following a rate increase as this is more dependent on government spending and oil prices.”
The Fed is quickening the pace at which it is pulling back its support for the post-pandemic US economy as inflation surges. It expects to raise interest rates to deal with inflation, which it had earlier characterised as mainly a “transitory” problem.
Currencies of Gulf states, with the exception of Kuwait, are tied to US dollar, and central banks in the region usually mimic the Fed’s interest rate moves. A rise in lending rates in the region will help banks improve their net interest margins and profitability.
The ratings agency said lower global liquidity is likely to have a limited impact on GCC banks because of their “strong net external asset positions or limited net external debt positions”.
Banks’ efficiency, facilitated by low cost of labour and limited taxation, will continue to support profitability, S&P said.
In a separate report this week, Egyptian investment bank EFG Hermes said major banks in the Middle East and North Africa are expected to post a 29 per cent annual increase in their aggregate fourth-quarter income amid continued economic recovery.
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