S&P believes GCC banks will enter an uncertain 2023 on solid footing
Potential liquidity constraints to fund growth
NEW YORK, Nov 7: S&P Global Ratings believes that the earnings performance of banks in the Gulf Cooperation Council (GCC) will recover almost to pre-pandemic levels in 2022, thanks to the economic recovery. Banks are also getting a boost from high oil prices, improving confidence, and for some countries--specifically Saudi Arabia--large government-sponsored projects. We expect cost of risk to return to normalized levels for most countries and higher interest rates to support banks’ bottom lines, and foresee no major regional merger or acquisitions on the horizon.
But things look less certain for 2023. We see three main sources of risk:
The expected slowdown of the global economy, which could affect the region primarily through commodity prices. Under our base-case scenario, we assume the Brent oil price will average $85 per barrel in 2023 and $55 in 2024 and beyond, resulting in lower growth for the GCC economies and fewer opportunities for their banking systems.
Banks’ exposure to riskier countries. A few GCC banks have ventured into countries with higher credit risk, particularly Turkiye and Egypt. Given the significant challenges these two countries face, we expect to see some impact on GCC banks. In Turkiye, for example, the lira’s depreciation has resulted in significant unrealized losses for exposed GCC banks. Moreover, the application of International Accounting Standard 29 on financial reporting in hyperinflationary countries has hit the bottom line of exposed Gulf banks. The impact has been manageable so far and banks have benefited from revaluation gains on their nonmonetary position, reported in comprehensive income.
Potential liquidity constraints to fund growth as local and global liquidity becomes less abundant. In Qatar, for example, the proportion of external funding is declining due to lower and more expensive liquidity globally. Nonresident deposits dropped by $19.5 billion at Aug. 31, 2022 from year-end 2021. This was offset by an increase in resident deposits of about $19.2 billion (60% public sector and 40% private sector). In Saudi Arabia, the channeling of oil receipts to the Public Investment Fund rather than to the banking sector, alongside strong lending growth, resulted in some temporary liquidity constraints in first-half 2022. We expect periodic episodes of liquidity pressure counterbalanced by central bank actions or the deployment of deposits by government-related entities.
Positive outlooks
Despite these risks, at Oct. 15, 2022, our outlook bias was firmly positive, with about 35% of ratings carrying positive outlooks either for potential improvement in their respective sovereign’s creditworthiness or idiosyncratic reasons. The remaining 65% of ratings had a stable outlook, mirroring banks’ expected resilience and still-supportive operating environment. Nevertheless, risks to global and local economic prospects are increasing.
Saudi Arabia Leads The Slight Acceleration In Lending Growth
Based on the data reported by the top 45 GCC banks, lending growth accelerated slightly in first-half 2022 to an annualized 9.5%, compared with 7.8% in 2021, due to greater economic activity and improving sentiment related to high oil prices. Saudi Arabia continued to propel the sample numbers with lending up almost 10% in the first half. We expect corporate lending to contribute to future growth as projects related to Vision 2030 are implemented. We also expect mortgages to continue contributing to growth, although more slowly than in the past couple of years, as the sector matures and increased interest rates reduces demand somewhat.
Lending growth remained muted in Qatar as projects related to the World Cup have been delivered and no significant new projects are being launched for now. We expect to see some lending growth for working capital and consumption in 2022. We then expect lending to accelerate slightly from 2023 as investment resume. For Kuwait, we expect to see accelerated lending growth from stronger economic growth and investment from the government. Finally, for the United Arab Emirates (UAE), lending growth has sped up thanks to improving sentiment. In 2023-2024, we expect
to see slower overall lending growth in the region from the expected slowdown in economic growth.
Of importance, the continued depreciation of the Turkish lira impaired lending growth for some of the large banks in the GCC with subsidiaries in Turkiye. Under our base-case scenario, we expect the lira’s depreciation will continue in 2023 and that we could see a repeat of this, although not as great.
The Pandemic’s Lingering Effects And Higher Interest Rates Will Contribute To Slight Asset Quality Deterioration
Banks’ asset quality indicators held up fairly well compared to the magnitude of the pandemic’s economic shock. Regulatory forbearance measures and timely liquidity support for the banking system helped affected corporates during the pandemic and they are now in a position to start repaying their debt as these measures are lifted. Some of this exposure has been restructured and could slip to nonperformance in 2022. We expect the overall impact on banks’ financials to remain contained. Write-offs and increasing real estate prices have helped in 2021-2022. Nevertheless, interest rate increases will contribute to weaker indicators in 2023, partly mitigated by our expectations that banks will pay close attention to the trade-off between the positive impact on profitability and asset quality deterioration. Under our base-case scenario, we expect nonperforming loan (NPL) ratios to increase but not exceed 5% by year-end 2023 unless the global economic slowdown proves more severe than our expectations. We also expect cost of risk to reach levels close to what we observed pre-pandemic.