Muscat – Profits of the GCC banks surpassed the pre-pandemic levels and reached another record level of nearly US$45bn during 2022.

Aggregate profits of the GCC banks last year surged by 27.1 per cent to reach US$44.8bn as compared to US$35.2bn recorded in the previous year, according to a report published by Kuwait-based Kamco Investment.

The year-on-year increase in 2022 profits was broad-based across the GCC with UAE-listed banks seeing the biggest absolute increase of US$4.1bn as well as the biggest percentage increase of 37.8 per cent to reach US$15bn profits during the year. Saudi-listed banks were next with an increase of US$3.7bn or 28.3 per cent to reach US$16.7bn profits, the highest in the GCC.

The growth in GCC bank profits during 2022 was led by an increase in total bank revenues as well as a decline in loan loss provisions.

Total bank revenues in the GCC increased by a strong 16.4 per cent to reach US$104.8bn during 2022, the highest on record mainly led by a increase in both net interest income as well as non-interest income, Kamco Investment said.

Revenue growth was broad-based across the GCC with all the country aggregates seeing double digit growth. Saudi-listed banks reported the biggest increase in revenues with a growth of 18.4 per cent to reach US$35.4bn, the highest in the GCC.

Loan loss provisions reported by GCC banks witnessed a steep decline during 2022 to reach US$11.9bn compared to US$14bn in 2021, the data showed.

Net interest margins rise on higher rates

Rising interest rates in the US and its almost full replication by most GCC central banks during 2022 resulted in higher aggregate net interest margin (NIM) for the GCC banking sector.

NIM for GCC banks averaged at a multi-year high of over 3.0 per cent during the fourth quarter of 2022 despite partially reflecting the higher interest rates as bulk of the rate hikes were made during the second half of the year.

Meanwhile, the aggressive rate hikes by the US Fed in 2022 followed by higher rates estimated this year is expected to have a positive impact on NIMs of GCC banks, Kamco Investment predicted.

‘However, the impact of rate hikes are reflected with a lag of three to four quarters. In addition, the extent to replication of rate hikes by GCC central banks vs US Fed fund rate hikes also affects the trajectory of NIMs in the GCC. Nonetheless, despite some GCC central banks implementing smaller increase in rates or increasing rates in a phased manner, the overall impact of a fed fund rate hike is expected to be positive for GCC banks,’ the report said.

On the other hand, credit growth in the GCC remained strong during the fourth quarter of 2022 despite higher interest rates, indicating strong economic activity and business confidence in the region.

Aggregate gross loans of GCC banks reached US$1.87tn at the end of fourth quarter of 2022, up 8.9 per cent year-on-year, mainly led by strong growth across the GCC, barring a marginal decline for Bahraini banks.

Total customer deposits reported by listed-GCC banks also continued to show growth during the fourth quarter of 2022 to reach a new record high of US$2.2tn.

The growth in customer deposits bounced back to a stronger growth during the fourth quarter of 2022 after showing a six-quarter low growth during the previous quarter.

Limited impact from global banking crisis

As per Kamco Investment’s view, the broader GCC banking sector is expected to see only a limited indirect impact from the ongoing banking sector crisis in the US and Europe.

Shares of banks globally and in the region, especially, were affected due to fears of a contagion as the collapse of Silicon Valley Bank (SVB) was the biggest lender failure since the global financial crisis of 2008.

However, the SVB collapse had only marginal impact with minimal exposure of banks only in the UAE, while most of the other countries in the GCC remained unaffected.

‘Moreover, the overall balance sheet of banks in the region remains generally strong with adequate funding and comfortably above the regulatory required ratios. The funding source for banks in the region are mainly customer deposits which continues to remain stable despite several fluctuations in the international financial markets,’ Kamco Investment said.