Outlook for GCC banks is stable amid economic recovery, Moody's says

Large infrastructure projects and regulatory measures will support lenders' credit growth in 2022

Large infrastructure projects and regulatory measures will support the credit growth of GCC banks in 2022, according to Moody's. Jeffrey E Biteng / The National

The outlook for GCC banks over the next 12 to 18 months is stable, as the region continues its recovery from the coronavirus pandemic on the back of higher oil prices, Moody’s Investors Service has said in a new report.

Large infrastructure projects and regulatory measures will also support the credit growth of GCC banks in 2022, according to the agency.

“Banks’ standalone credit profile remains strong, aided by high capital buffers, solid profitability and improving economic conditions,” it said. “Non-performing loans will rise slightly as loan payment holidays expire but asset quality will remain sound overall.”

The size of the total banking assets in Saudi Arabia stands at $829 billion, while in the UAE it is $873bn. The total banking assets of Kuwait and Qatar are $248bn and $481bn, respectively.

Saudi Arabia, the Arab world’s largest economy is expected to grow 4.8 per cent next year, while the UAE, the second-largest economy in the region, will grow 3 per cent, according to the International Monetary Fund.

Higher oil prices are also supporting the economies of the GCC countries, Moody's said.

Brent, the benchmark for two-thirds of the world’s oil, is currently trading about $75 per barrel, while WTI is at $71.67 per barrel. Both benchmarks have risen more than 40 per cent since the start of the year as demand picked up worldwide due to the easing of travel restrictions.

As oil prices rebound, “GCC economies are on a firm footing for growth in 2022 and beyond”, Moody's said in the report.

A number of banks in the region have merged since 2014 and the trend is expected to continue despite higher oil prices, according to the report.

Saudi’s National Commercial Bank and Samba Financial Group merged to form Saudi National Bank with total assets of $214bn earlier this year. In the UAE, Dubai Islamic Bank acquired Noor Bank last year, while the National Bank of Bahrain increased its stake in Bahrain Islamic Bank.

Loan demand from private-sector businesses continues to be strong, particularly in Saudi Arabia, while funding conditions will remain favourable as interest rates remain low and government finances improve, Moody's said.

“We expect credit growth to be above 5 per cent on average for GCC banking systems. Completion of large infrastructure projects, such as stadiums for the Fifa World Cup in Qatar in 2022 and 'giga-projects' in Saudi Arabia as part of its Vision 2030 programme will drive credit demand in 2022,” it said.

Saudi Arabia is building a large number of projects as part of its Vision 2030 programme to diversify its economy away from oil.

The new projects include the $500bn Neom development along the Red Sea, as well as Qiddiya, a huge entertainment and sports project in the capital, Riyadh. The Red Sea Development Company is also building a mega-tourism project on the country's west coast.

Deposit growth is also expected to improve, while ample liquidity in the banking system will provide a shield against unexpected shocks and GCC governments will continue to come to the aid of banks in difficult times, Moody's said.

“Economic growth in 2022 will reflect a gradual increase in hydrocarbon production and a strong recovery in other segments of the economy,” said Ashraf Madani, vice president and senior analyst at Moody’s and the author of the report. “Banks' asset quality will remain high, even as non-performing loans rise slightly as repayment holidays expire.”