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SECTOR STAYS STRONG

GCC banks' lending growth likely to decline: S&P

DUBAI, February 1, 2023

Tighter local monetary policy conditions and lower economic growth will lead to a decline in lending growth for Gulf Cooperation Council (GCC) banks, S&P Global Ratings has said in a report.
 
The 'GCC Banking Sector Outlook Cautiously Optimistic' report was published yesterday (Jan 31).
 
"We expect banks' asset quality indicators to deteriorate only slightly because of slowing growth and higher interest rates," said S&P Global Ratings credit analyst Mohamed Damak.
 
Although banks have absorbed the impact of the pandemic, they also continued to build provisions and write off nonperforming loans to make space for new ones. Profitability has recovered to pre-pandemic levels in most GCC countries thanks to higher interest rates and stable cost of risk. Meanwhile, banking sector efficiency remains strong, but inflation will increase operating costs.
 
"Lower global liquidity is likely to have a limited impact on GCC banks because of their strong net external asset positions or limited net external debt positions. Qatar is more vulnerable than other countries owing to its large but declining net external debt position," Damak concluded.
 
Strong capitalisation and potential extraordinary government support, in case of need, continue to support banks' creditworthiness. Moreover, rating bias remains positive, driven by sovereign and idiosyncratic factors, and the Russia-Ukraine conflict also has more limited implications for the region and its banks than other Middle Eastern or North African countries.
 
The report does not constitute a rating action, S&P Globat Ratings said.
 
The report expects Gulf Cooperation Council (GCC) economies to slow in 2023 due to lower oil production volumes, while higher interest rates are also likely to dampen non-oil growth. There is some upside from China’s relaxation of zero-Covid restrictions and moderating headline inflation, however.
 
Key highlights of the report:
• Tighter local monetary policy conditions and lower economic growth will lead to a decline in lending growth. Saudi Arabia will remain the main contributor to lending growth as it implements its Vision 2030 strategy to diversify the economy.
• The report expects banks’ asset quality indicators to deteriorate only slightly because of slowing growth and higher interest rates. Although banks have absorbed the impact of the pandemic, they also continued to build provisions and write off nonperforming loans (NPLs) to make space for new ones.
• Profitability has recovered to pre-pandemic levels in most GCC countries thanks to higher interest rates and stable cost of risk.
Although banking sector efficiency remains strong, inflation will increase operating costs.
• Lower global liquidity is likely to have a limited impact on GCC banks because of their strong net external asset positions or limited net external debt positions. Qatar is more vulnerable than other countries owing to its large but declining net external debt position.
• Strong capitalisation and potential extraordinary government support, in case of need, continue to support banks’ creditworthiness.
• Rating bias remains positive, driven by sovereign and idiosyncratic factors.
• The Russia-Ukraine conflict has more limited implications for the region and its banks than other Middle Eastern or North African
countries.



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