Gulf Cooperation Council (GCC) banks are set to benefit from a regional economic recovery this year amid higher oil prices, supportive government spending, and normalising non-oil activity, S&P Global Ratings said yesterday in a report.
The report said, “We expect the Brent oil price to average $65 per barrel in 2022. Improving economic sentiment and higher hydrocarbon production should lead to accelerated economic growth in the region. However, an uncontrolled resurgence in the pandemic that reduces mobility could hamper the global and regional economic recovery.”
“We expect banks’ asset quality indicators to deteriorate only slightly as regulatory forbearance measures have helped the corporate sector to deal with the negative effects of the pandemic. In our view, the nonperforming loan (NPL) ratio will rise in the next 12-24 months without exceeding 5 percent, compared with 3.7 percent at September 30, 2021. Corporates in general are seeing a gradual recovery but certain sectors remain under pressure such as aviation and hospitality,” the report added.
The GCC banks’ profitability is improving and could benefit from higher rates the report said, “Margins have stabilised for now and cost of risk has dropped compared with last year. We expect cost of risk to normalise over the next couple of years and margins to benefit from the expected increase in interest rates. Banks’ efficiency continues to support profitability, helped by low cost of labor and limited taxation.”
Regarding the interest rates of GCC banks it said, potential hikes will support banks’ earnings. GCC banks are positively geared to rising interest rates. On average, a 100-basis-point (bps) increase in rates would result in a 14 percent increase in earnings and 1 percent capital accretion.
The report said, “We do not expect a major slowdown in lending growth following a rate increase as this is more dependent on government spending and oil prices. However, external funding might become scarce and more expensive and asset quality indicators could be impacted in case of a faster than expected increase in rates”.
The capitalisation of GCC banks will continue to support their creditworthiness in 2022. Banks stepped up their additional Tier 1 (AT1) issuances (both conventional and Islamic) in 2020-2021 to benefit from supportive market conditions. As interest rates are expected to increase, we might see lower issuance volumes in 2022, it noted. GCC banks are mainly funded by domestic deposits, which have proved stable through periods of economic stress. These balances reflect the working balances and savings of residents, with expatriate populations remitting regularly. Public sector deposits typically account for 15 percent to 30 percent of the deposit base, which supports banks’ funding profiles.
Amid a tight job market, accelerated inflation readings over the past few months, and increasingly hawkish forward guidance from the US Federal Reserve, we now expect three rate hikes in 2022, with the first hike expected in May. This will prompt a similar reaction from GCC central banks given their currency pegs.
Banks will benefit from such an increase assuming no material impact on asset quality. Lower global liquidity is likely to have a limited impact on GCC banks thanks to their strong net external asset positions or limited net external debt positions. Strong capitalization and government support will continue to reinforce banks’ creditworthiness.
