Saudi Arabia discusses ways to accelerate growth of digital economy, technology and innovation after G20

RIYADH: Gulf Cooperation Council banks are regaining their form after a strong first half of 2022, with profits for most of them reaching near pre-pandemic levels by the end of the year, according to S&P Global Ratings.

This optimism is boosted by high oil prices, rising interest rates, support for bank solvency, as well as new projects supported by the public sector, the agency said.

In the first half, margins improved slightly in most systems.

Saudi and Kuwaiti banks were the best performers among the four largest GCC markets, with profits already nearing pre-pandemic levels, while Qatari and UAE banks are taking a bit longer to recover, according to the report.

In the second half of the year, higher net interest margins will likely offset an increase in the cost of risk, leaving banks with higher annual profits than in 2021.

The cost of risk should stabilize at normalized levels this year, partly thanks to adequate provisioning.

Still, some loans that received support measures could become non-performing, S&P said.

GCC banks face a less certain 2023, with expectations of lower oil prices and risks to economic growth in the United States and Europe.

Saudi Arabia

With the financial performance of Saudi banks nearly back to pre-COVID-19 levels, S&P expects an average return on assets of 2% in 2022, up from 2.1% in 2019.

Credit to the private sector increased by 8.5% in the first half of the year, due to stronger than expected growth in mortgage loans, due to market saturation and a recovery in demand for credit to businesses driven by Vision 2030 projects.

The aggregate cost of risk remained low at around 46 basis points due to the strong economic recovery, and the share of Stage 3 loans remained broadly stable, estimated at around 2%.

Saudi banks’ non-performing loan coverage stood at 160% to 170% in 2022.

The credit growth momentum will continue in the second half of the year, mainly due to a stronger than expected performance of the mortgage portfolio, according to S&P.

“We now expect credit growth to reach around 15% in 2022,” the agency said.

However, rising interest rates and market saturation are expected to eventually curb mortgage origination.

S&P expects corporate lending to start contributing to lending growth as gradually rising interest rates will continue to fuel Saudi bank margins, possibly pushing them higher by the end of the year. end of the year.

Nonetheless, the cost of risk is expected to rise somewhat in the second half to 70-80 basis points as some of the loans restructured after the pandemic are reclassified.

System-wide ROA is expected to stabilize between 1.9% and 2.1% from 2022.

The growing risk of recessions in the United States and Europe, as well as higher interest rates, could put pressure on the operating environment in the Kingdom, especially if oil prices fall. In addition, higher interest rates could lead to a move away from commission-free deposits, which could put pressure on banks’ margins.

The bucket

Rising interest rates and lower cost of risk in the UAE will support profitability in the banking sector, according to S&P Ratings.

Asset quality should also stabilize while NPLs should remain contained with the end of the support program.

Bank performance in the UAE improved in the first half of 2022 due to lower cost of risk and higher interest rates, while the Central Bank’s targeted COVID-19 economic support program of the UAE has also helped the system, limiting the increase in PNP.

At the same time, the macroeconomic environment has started to improve thanks to higher oil prices and the recovery of the non-oil sector.

Better operating conditions led to higher loan growth in the first half of 2022 compared to 2021, although this could be tempered by an increase in interest rates in the second half.


Rising oil prices and economic recovery in Kuwait supported faster loan growth and lower cost of risk, creating a favorable environment.

A further reduction in the cost of risk and higher loan growth of 9% year-on-year in the first half led to stronger earnings for banks.

Non-interest income continued to benefit from an improved operating environment, while higher inflation and the recovery of certain costs as the pandemic subsided led to a 10% increase operating costs compared to the first half of 2021, offsetting the benefits of higher revenues.

Momentum may slow in the second half, with some NPL formation, according to S&P Global.


Credit to the Qatari private sector is expected to grow by 5% in 2022, less than half the average rate seen over the previous three years, according to S&P Global.

The World Cup at the end of the year as well as the positive sentiment stemming from high natural gas prices will push consumer loans towards the strongest growth.

However, government construction projects have mostly been completed, as evidenced by the performance of banks in the first half.

Overall credit could decline slightly if government lending continues to fall in the second half, which the agency sees as likely given the projected budget surplus of around 12% of GDP.

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