Muscat – The earnings performance of the GCC banks will recover almost to pre-pandemic levels by the end of 2022, thanks to the strong economic recovery in the region, S&P Global Ratings said on Monday.

‘We expect GCC banks’ profitability to improve and almost reach pre-pandemic levels by the end of 2022, helped by stronger economic growth and higher interest rates,’ S&P said in a report.

GCC banks, the ratings agency said, are also getting a boost from high oil prices, improving confidence, and for some countries – specifically Saudi Arabia – large government-sponsored projects.

‘We expect cost of risk to return to normalised levels for most GCC countries and higher interest rates to support banks’ bottom-lines and foresee no major regional mergers or acquisitions on the horizon,’ S&P noted in the report, titled ‘GCC banks will enter an uncertain 2023 on solid footing.’

But things look less certain for 2023 and S&P sees three main sources of risk: The expected slowdown of the global economy, which could affect the region primarily through commodity prices; banks’ exposure to riskier countries; and potential liquidity constraints to fund growth as local and global liquidity becomes less abundant.

‘Despite these risks, at October 15, 2022, our outlook bias was firmly positive, with about 35 per cent of ratings carrying positive outlooks either for potential improvement in their respective sovereign’s creditworthiness or idiosyncratic reasons,’ S&P said.

The remaining 65 per cent of ratings had a stable outlook, mirroring banks’ expected resilience and still-supportive operating environment. Nevertheless, risks to global and local economic prospects are increasing, the rating agency added.

Based on the data reported by the top 45 GCC banks, S&P said lending growth accelerated slightly in first-half 2022 to an annualised 9.5 per cent, compared with 7.8 per cent in 2021, due to greater economic activity and improving sentiment related to high oil prices.

‘The economic backdrop for 2023 appears less certain as the global economy slows, and we assume the Brent oil price will average US$85 per barrel in 2023,’ S&P noted.

The rating agency further said that the GCC banks’ asset quality indicators held up fairly well compared to the magnitude of the pandemic’s economic shock.

It said, ‘Regulatory forbearance measures and timely liquidity support for the banking system helped affected corporates during the pandemic and they are now in a position to start repaying their debt as these measures are lifted. Some of this exposure has been restructured and could slip to non-performance in 2022.’

S&P expects the overall impact on GCC banks’ financials to remain contained. It said that write-offs and increasing real estate prices have helped in 2021-2022.

‘Nevertheless, interest rate increases will contribute to weaker indicators in 2023, partly mitigated by our expectations that banks will pay close attention to the trade-off between the positive impact on profitability and asset quality deterioration. Under our base-case scenario, we expect non-performing loan (NPL) ratios to increase but not exceed 5 per cent by year-end 2023 unless the global economic slowdown proves more severe than our expectations,’ S&P said.

The rating agency said support from GCC regulators helped avoid the worst for asset quality indicators, but it still foresees a slight deterioration from pandemic-related imbalances.