Banks in the GCC stand to gain from higher energy prices and a rise in interest rates that will significantly improve their bottom lines as cost of risk continues to decline amid economic growth in the region, S&P Global Ratings said.
On average, a 100-basis-point (bps) increase in benchmark interest rates would boost earnings by 13 per cent and result in 1 per cent capital accretion for lenders across the region, Mohamed Damak, senior director for Financial Institutions Ratings, told a webinar on Thursday.
The drive to increase efficiencies and aggressive technology adoption to cut costs will also bolster banks' earnings.
“We expect the cost of risk to continue to reduce and normalise over the next one to two years, which will support the banks’ profitability,” Mr Damak said.
“The other factor that will support profitability in 2022 is the expected increase in interest rates,” he said and added that S&P expects six rate increases this year, including the one announced earlier this month.
On March 16, the central banks of the UAE, Saudi Arabia, Bahrain and Kuwait increased their benchmark interest rates after the US Federal Reserve raised its key rates to rein in inflation, which has hit a 40-year high in the world's largest economy.
Most GCC central banks follow the Fed's moves on key interest rates due to their currency peg to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies.
There is also little direct impact of the Russia-Ukraine war on banks in the GCC, as opposed to some European and global banks that have exposure to clients in the Russian and Ukrainian markets. The impact of the conflict on energy prices that rallied to a notch under $140 per barrel mark earlier this year will indirectly benefit lenders.
Brent, the benchmark for more than two thirds of the world's oil, has given up some gains but it still trading above the $120 per barrel mark.
“The good news is that the direct impact is limited for rated banks at least, due to limited exposure to both countries [engaged] in the conflict,” Mr Damak said.
“The indirect impact could materialise through higher oil prices, which is [actually] positive for the region, positive for the economy and positive for sentiment.”
The rating agency expects lending growth to pick up pace in the GCC despite rising interest rates.
“We expect a further acceleration as it [lending] has been accelerating already in some regional countries,” Mr Damak said.
Lending growth is expected to remain in the double digits in Saudi Arabia, the biggest Arab economy, primarily driven by growth in mortgages. The oil and gas and retail sectors will also “contribute to growth”, he said.
Kuwait’s lending markets will also expand, spurred by retail lending and the oil and gas sector, while in Qatar, “the government remains the main impetus for higher lending”, he said.
The rate of growth in the UAE, which has been relatively lower than that of Saudi Arabia, will also see “some acceleration” this year, Mr Damak added.
For the top 25 banks in the region, the asset quality indicators have been highly resilient and there was even a small decline in overall ratio of non-performing loans at the end of 2021, thanks largely to write-offs in bad debts, he said.
“Overall, we don’t expect the NPL ratio to exceed 5 per cent.”