Riyadh, Saudi Arabia–A new report by S&P Global suggests that banks in the Gulf Cooperation Council (GCC) region are expected to maintain their resilience despite less favorable operating conditions, thanks to ongoing economic diversification efforts.
The credit rating agency highlights that a combination of higher interest rates and production cuts by the Organization of the Petroleum Exporting Countries (OPEC) is expected to restrain near-term growth prospects for major GCC economies.
Nevertheless, non-oil growth is anticipated to bolster the region’s economies, particularly in Saudi Arabia and the UAE.
S&P Global Ratings credit analyst Zeina Nasreddine stated, “Despite a slight deterioration in asset quality indicators and an increase in the cost of risk, we expect GCC banks will report stronger profitability in 2023. This is because of higher net interest margins and generally lower-cost business models.”
The report points out that the expected increase in interest rates will soften total lending growth for Saudi banks in 2023, reducing it to about 10 percent from the 14 percent recorded the previous year. Saudi Arabia’s Vision 2030 program is highlighted as a key factor contributing to the attractiveness of the country’s banking sector.
S&P Global anticipates that Saudi banks will achieve a return on assets (ROA) of 2.2 percent in 2023, surpassing the GCC average of 1.8 percent. The report attributes this outperformance to Saudi banks’ high exposure to government-backed mortgage lending.
Meanwhile, UAE banks are poised to benefit from robust non-oil GDP growth, which is expected to offset the negative impact of higher interest rates on credit expansion. The report projects that UAE banks’ credit growth will reach 7 percent in 2023, up from 5 percent in 2022.
In contrast, Kuwaiti banks are expected to experience a significant slowdown in credit growth, dropping to approximately 3 percent in 2023 from nearly 8 percent in 2022 due to higher interest rates.
Qatari banks, unlike their GCC counterparts, will continue to experience a sharp decline in credit growth. The report attributes this decline to the timely completion of the country’s major infrastructure projects, which drove credit demand through contractors in preparation for the 2022 FIFA World Cup.
Additionally, sluggish demand in the rental real estate market is expected to weaken asset quality metrics for Qatari banks.
Despite the challenges posed by rising interest rates, GCC banks, especially those in the UAE and Saudi Arabia, are expected to report stronger profitability in 2023.
This is attributed to higher net interest margins and lower-cost business models, supported by the robust non-oil economic growth in the region.
S&P Global Ratings concludes that while credit growth has slowed due to rising interest rates, the strong gross domestic product growth in the non-oil sectors of Gulf countries will provide support to the region’s banks, ensuring their continued resilience in the face of economic challenges.