Major Mena banks to post 29% jump in fourth- quarter earnings, EFG Hermes says

Earnings outlook for banks in the GCC is also improving with potential interest rate increases this year

Dubai Islamic Bank is among regional banking stock picks for EFG Hermes. Photo: Dubai Islamic Bank

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, led by lenders in Saudi Arabia and the UAE amid continued economic recovery, Egyptian investment bank EFG Hermes said.

Saudi Arabian banks included in the research by EFG Hermes are expected to report a 32 per cent growth in earnings for the last three months of 2021, the Egyptian bank said in a research note on Monday.

Lenders in the UAE are projected to post 36 per cent income growth, while Kuwait banks will be at 22 per cent, Egyptian lenders at 21 per cent, with Oman and Qatar institutions each growing by 16 per cent.

EFG Hermes, however, expects overall provisioning for bad loans to rise quarter-on-quarter in the last three months of 2021. This is driven partly by “seasonality” as banks tend to book higher credit costs in the fourth quarter after a review of credit portfolios with their respective regulators.

“The rapid spread of Omicron in the past few weeks ... may prompt banks to take a more cautious view on provisioning in the short term,” EFG Hermes analysts said.

The extension of the central bank-sponsored loan moratoriums beyond December last year for specific sectors in the UAE and Saudi Arabia will likely keep non-performing loans in check in the short term, they said.

Investors will keenly watch the fourth quarter earnings, with dividends being a key focus for banks in the UAE, which offer the highest dividend yields in the GCC. EFG Hermes also expects cash dividends to return in Egypt for 2021 earnings after the central bank banned them in 2020 amid the pandemic-driven slowdown.

The potential increases in interest rates in the second half of this year also brighten the earnings outlook particularly for lenders in the six-member GCC economic bloc in 2022, EFG Hermes said.

For Saudi Arabian banks, EFG Hermes estimated aggregate earnings growth of 15 per cent this year. It also projected UAE lenders to record growth of 10 per cent, Kuwaiti banks 18 per cent and Qatari banks 13 per cent in 2022.

“Net interest margin expansion on rate hikes (in 2H22), further normalisation in credit costs and an uptick in both credit demand and fee income on improving business activity bode well for solid earnings growth for GCC banks in 2022,” EFG Hermes analysts said in the report.

The US Federal Reserve 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 three times next year 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 lenders improve their net interest margins and profitability.

Dubai Islamic Bank is among EFG Hermes’ regional stock picks. The biggest Sharia-compliant lender in the UAE has “scope for normalisation, high exposure to real estate, a sector which has performed well, and reasonable valuations for an Islamic bank”, it said.

Saudi National Bank, Gulf Bank Kuwait, National Bank of Kuwait, Egypt's Commercial International Bank and Abu Dhabi Islamic Bank are also among EFG’s stock picks.