Profitability and credit growth of Gulf banks to remain strong this year, S&P says

Profitability and credit growth will remain strong for most banks in the Gulf this year, supported by robust credit demand from the non-oil sector and economic diversification programmes across the region, S&P Global Ratings has said.

The UAE and Saudi banking systems are set to continue their growth above the rest of the region, the credit rating agency said.

The agency expects GCC banks to deliver strong return on assets supported by the robust macroeconomic environment.

“Non-oil growth should remain particularly dynamic in Saudi Arabia and the UAE,” said S&P analyst Benjamin Young. “The economic environment will support credit demand and credit growth … This will support their profitability.”

Banks in the six-member GCC bloc are benefitting from continued economic growth momentum despite global challenges and geopolitical uncertainties.

S&P expects interest rates in the GCC to remain high but fall by 1 per cent by the end of the year, in line with the US Federal Reserve, as inflation is projected to remain on target and contained by price administration measures.

Economies of oil-exporting Gulf nations have bounced back strongly from the pandemic-induced slowdown, driven by both oil and non-oil sectors.

The UAE, the Arab world’s second-largest economy, expanded 3.7 per cent annually in the first half of last year, driven by strong non-oil sector growth, Minister of Economy Abdulla bin Touq said in October.

Last month, the UAE Central Bank increased its 2024 growth forecast for the country’s economy to 5.7 per cent, from its earlier estimate of 4.3 per cent, due to an expected rise in oil production next year. The banking regulator also raised the UAE’s non-oil gross domestic product growth to 5.9 per cent and 4.7 per cent, for 2023 and 2024, respectively.

Saudi Arabia’s economy, which expanded 8.7 per cent in 2022, the highest annual growth rate among the world’s 20 biggest economies, is estimated to have climbed 0.8 per cent last year, according to the International Monetary Fund. The largest Arab economy is expected to expand 4.1 per cent this year, according to the World Bank.

In its latest regional economic outlook, the IMF revised down the GCC growth forecast to 0.5 per cent in 2023, 1 percentage point lower than its October estimate, but the bloc’s economies are expected to rebound to 2.7 per cent this year.

Structural reforms by GCC members are supporting economic diversification, while increased domestic demand and capital inflows are also contributing to growth, the IMF said.

Broadly, the region’s credit growth is linked to public expenditure cycles, which are typically supported by hydrocarbon revenue and private sector activity influenced by sentiment related to the oil price outlook, S&P said.

“For credit growth, this means that although a base-effect compounded by higher-for-longer rates, increasing risk aversion, and uncertain external economic activity will weaken demand and increase lending caution, we still expect healthy lending for the year,” it said.

While the profit margins are forecast to remain strong for most GCC banks, S&P anticipates a slight softening from 2023 levels.

The agency expects the real GDP growth of GCC states to accelerate in 2024, except Bahrain, driven by stable oil prices.

“Notwithstanding volatile supply-demand dynamics, we expect oil prices to remain broadly stable over 2024, which, we believe, will support continued fiscal expenditure.”

S&P expects the asset quality of GCC banks to remain strong this year, given the high levels of precautionary provisioning.

The banks’ strong capitalisation levels are expected to support their creditworthiness and rating strength, according to the rating agency.

S&P said it expects further strengthening of capitalisation levels in 2024 on a risk-adjusted basis as most banks in the region are well capitalised and with high levels of profitability, internal capital generation is expected to boost ratios for many banks.

“We expect regional [ratings] strengths to remain, on average, close to ‘A-’, compared with a global average in the ‘BBB’ category,” it said.

Meanwhile, on key rating matrices such as funding and liquidity, GCC banks score high, according to S&P.

The region’s banks are predominantly funded by strong and stable domestic deposits and display strong net external positions, with the exception of Qatar where high rates of domestic (credit) growth have outpaced deposit funding, it said.

In Saudi Arabia, too, the rating agency expects a rising loan-to-deposit ratio eventually leading to higher external funding.

“We typically view external funding as less stable but continue to think GCC banks are well protected from external outflows,” S&P said.

The asset quality of the banks expected to stay strong amid high levels of precautionary provisioning