The profitability of banks in Kuwait, Saudi Arabia, Qatar and the UAE will reach pre-pandemic levels by the end of 2022, supported by high oil prices, raising interest rates and new infrastructure projects supported by regional governments, according to a recent report published Standard & Poor’s credit rating agency suggesting stability of risk costs in the region’s banks in 2022, partly due to adequate provisions, but some loans that benefited from government support measures may become ineffective, noting that Gulf banks may face a less certain year in 2023, amid expectations of lower oil prices and risks to American and European economic growth.

Standard & Poor’s pointed out that the profit margins of most Gulf banks improved slightly in the first half of this year, and among the 4 largest Gulf banking systems, Kuwaiti and Saudi banks showed the strongest semi-annual performance this year, as their profits in the first half reached pre-pandemic levels, while it will take Banks in Qatar and the UAE take longer to recover.

The report indicated that the rise in oil prices and the economic recovery led to faster growth in lending in Kuwaiti banks and to lower risk costs. The strong profits of Kuwaiti banks in the first half are mainly due to a further decrease in risk costs and a growth in lending by 9%, in conjunction with the rise in oil prices, the recovery of Kuwait’s economy and the improvement of the operating environment. However, Kuwaiti banks saw profit margins in the first half that were lower than the agency’s expectations, amid increased competition in bank lending in the country.

The non-interest income of Kuwaiti banks continued to benefit from the improvement in the operating environment in the first half, however, the rise in inflation and the resumption of payment of some costs with the receding of the pandemic led to an increase of 10% in the operating costs of Kuwaiti banks in the first half. Standard & Poor’s expected the cost of risk for Kuwaiti banks to continue to decline to 0.85% in 2022 from 0.9% in 2021, partly due to coverage of non-performing loans by the Kuwaiti banking sector..

However, the bank lending momentum is likely to slow in the second half, while the profit margins of banks will improve slightly in the same period. The agency also expected a slight rise in non-performing loans in the second half, due to continued pressure from oversupply in the commercial real estate sector (mostly office space), but at a lower level than last year, says the report, indicating a decrease in the second stage loans (loans with high credit risks) from 9.6 percent in the first half of last year to 7.9 percent in the first half of this year, and a decrease in the third stage loans (non-performing loans) from 2.5 percent in the first half from 2021 to 1.4% in the first half of 2022, in light of an improved operating environment for Kuwaiti banks this year.

While Standard & Poor’s expected a recovery in residential and commercial real estate prices in Kuwait in the next stage, it stressed that concerns in the real estate sector lie in other parts of this market, which may impede the quality of banks’ assets in Kuwait, noting that the rate of exposure of Kuwaiti banks to The real estate and construction sector amounted to 25% of the total lending in the first half of this year. She said: We understand that part of this exposure is due to companies with diversified financial flows, and therefore we expect non-performing loans to the real estate sector to diminish in the second half.

The sources added, the performance of the residential real estate sector is still strong with the rise in supply and prices, but in general we do not see that this sector constitutes a source of risk for Kuwaiti banks, because housing loans are supported by the salaries of citizens.

The agency indicated a slow recovery in the investment real estate sector as a result of the price correction witnessed last year, due to the emigration of large numbers of expatriates from Kuwait amid the repercussions of Corona and expected the sector’s recovery to continue in the next 12 to 24 months, driven by stronger economic prospects and the return of expatriates, but the recovery of the real estate sector in Kuwait may be hampered by many economic obstacles, most notably the increase in the real estate supply.

The commercial real estate sector, especially office spaces, continues to suffer from pressures due to weak demand, high supply and the shift to online retail, which may lead to the formation of some non-performing loans in the sector by the end of 2022.

The Standard & Poor’s report stated that the strong momentum of Gulf banks since the beginning of 2020 may not be enough to protect them from the negative economic developments expected in 2023. “Our expectations also indicate that the average price of a barrel of oil will reach about $85 next year, compared to $100 per barrel for the remaining period of 2022.”

Moreover, Standard & Poor’s sees a high chance of a recession in the US in the next 12 months. In Europe, the increased geopolitical risks and high inflation may lead to weak economic growth, and this may harm global growth and put pressure on commodity prices, which may lead to indirect negative effects on the economies of the Gulf states and their banks as well.


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