GCC banks face uncertain 2023 on solid footing

GCC banks, whose earnings are on track to recover to almost pre-pandemic levels in 2022, will enter an uncertain future in 2023 amid the prospects of a global recession and lower oil income.

Even as the banks in the region appear to finish the current year on a high note, thanks to stronger economic activity, higher interest rates, and elevated oil prices, the economic scenario for the GCC in 2023 looks less certain as the global economy slows, while Brent oil price is expected to average $85 per barrel in 2023, S&P Global Ratings said.

However, according to PwC, while the outlook for most countries has been revised down, economic growth forecasts have been slightly revised up for the GCC. This is due in part to a combination of continued strong oil revenue for the oil-exporting nations, which will provide a buffer for their non-oil economies and allow them to run sizable fiscal surpluses, and inflation easing down, expected to average about 2.7 per cent in 2023 across the GCC.

In 2024, S&P expects lending to accelerate slightly from 2023 as investment resumes. For Kuwait, S&P expects to see accelerated lending growth from stronger economic growth and investment from the government. “For the UAE, lending growth has sped up thanks to improving sentiment. In 2023-2024, we expect to see slower overall lending growth in the region from the expected slowdown in economic growth.”

S&P Credit analyst Mohamed Damak and Benjamin J Young see three main sources of risk next year.

“An expected slowdown of the global economy could affect the region primarily through commodity prices. Under our base-case scenario, we assume the Brent oil price will average $85 per barrel in 2023 and $55 in 2024 and beyond, resulting in lower growth for the GCC economies and fewer opportunities for their banking systems.”

Banks' exposure to riskier countries is another challenge. A few GCC banks have ventured into countries with higher credit risk, particularly Turkiye and Egypt. “Given the significant challenges these two countries face, we expect to see some impact on GCC banks. In Turkiye, for example, the lira's depreciation has resulted in significant unrealized losses for exposed GCC banks.”

The rating agency noted that as local and global liquidity becomes less abundant, banks face potential liquidity constraints to fund growth.

Based on the data reported by the top 45 GCC banks, lending growth accelerated slightly in first-half 2022 to an annualised 9.5 per cent compared with 7.8 9.5 per cent in 2021, due to greater economic activity and improving sentiment related to high oil prices. Saudi Arabia continued to propel the sample numbers with lending up almost 10 per cent in the first half.

S&P expects corporate lending to contribute to future growth as projects related to Vision 2030 are implemented. It also expects mortgages to continue contributing to growth, although more slowly than in the past couple of years, as the sector matures and increased interest rates reduces demand somewhat.

According to S&P data, while non-resident deposits dropped by $19.5 billion as on August 31, 2022 from year-end 2021 it was offset by an increase in resident deposits of about $19.2 billion (60 per cent public sector and 40 per cent private sector).

— issacjohn@khaleejtimes.com