Saturday 20 / April / 2024
Muscat: 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, according to a new report.
Shares of banks globally and in the region, especially, were affected due to fears of contagion as the collapse of SVB was the biggest lender failure since the global financial crisis of 2008.
“However, the collapse had only marginal impact with minimal exposure of banks only in the UAE, while most of the other countries in the Gulf Cooperation Council (GCC) remained unaffected, the Kuwait-based Kamco Invest said in its latest report.
The bulk of the exposure was from various start-ups and Venture Capitals (VCs) that had accounts with SVB that may now bank with local banks, although under increased scrutiny.
“Various central banks in the region also announced that banks have limited exposure to SVB,” the report further said.
A report from S&P showed that out of the 19 GCC banks the agency rates, the aggregate exposure to the whole of the US was 4.6 per cent of assets and 2.3 per cent of liabilities at the end of 2022. The report said that GCC banks normally have limited lending activity in the US and most of the assets that these banks hold are invested in high-credit quality instruments or with government instruments.
In terms of exposure to Credit Suisse (CS), the bulk of the impact was on the holders of AT1 issued by CS which saw a complete write-off of around $17 billion. The overall global market for AT1 was also affected as additional funding became more difficult from this market for the global banking sector.
In terms of shareholders of CS in the GCC, Saudi National Bank (SNB) acquired a 9.9 per cent stake in the bank late last year for $1.5 billion. After the UBS acquisition, this stake is said to be worth $280 million, according to a MarketWatch report. SNB also said in a recent statement that the CS dilemma will not affect the bank’s growth plans. The impact on SNB’s capital adequacy ratio was about 35 bps after the UBS takeover and there is no expected impact on SNB’s profitability, according to the statement.
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 is mainly customer deposits which continue to remain stable despite several fluctuations in the international financial markets. And the direct or indirect support from governments in the region to the sector provides comfort on the sector’s creditworthiness.
Lending growth
Lending growth continued to remain strong in the GCC during the fourth quarter (Q4) of 2022 resulting in record-high loan books at the end of the quarter. Aggregate gross loans reached $1.87 trillion, up 3.2 per cent quarter-on-quarter (q-o-q) and 8.9 per cent year-on-year (y-o-y), mainly led by strong growth across the GCC, barring a marginal decline for Bahraini banks. Kuwaiti banks reported the strongest q-o-q growth in lending mainly led by the KFH takeover of AUB and the associated consolidated gross loan book for both banks. Qatari banks were next with a growth of 3.2 per cent in gross loans that reached $603 billion after four out of seven listed banks in Qatar reported higher q-o-q gross loans.
The trend in net loans was similar with listed banks in all GCC countries reporting higher q-o-q net loans at the end of Q4-2022, barring Bahraini banks that reported a 0.3 per cent decline. Aggregate net loans at the end of the quarter reached $1.77 trillion registering a growth of 2.8 per cent or $48.7 billion.
The Kmaco Invest report further said that 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 per cent during Q4-2022 despite partially reflecting the higher interest rates as the bulk of the rate hikes were made during the second half of the year. Saudi Arabian banks reported the highest average margin of 3.2 per cent during the quarter followed by UAE and Qatari banks with margins also above the 3 per cent mark after several quarters. Higher margins were also reflected in yield on credit (net interest income vs. aggregate gross loans) for the GCC banking sector that also reached a multi-quarter high of 4 per cent during Q4-2022 as compared to 3.7 per cent during Q3-2022.
Bottom-line performance for the GCC banking sector remained flattish q-o-q with net income reported at $11.4 billion, in line with the previous quarter. This came despite higher net interest income and non-interest income during the quarter with total bank revenue reaching another record of $28 billion. However, higher operating expenses as well as elevated provisions booked during the quarter offset most of the earnings growth recorded during Q4-2022.
The growth in customer deposits bounced back to a stronger growth during Q4-2022 after showing a six-quarter low growth during the previous quarter. Aggregate q-o-q growth in customer deposits stood at 2.5 per cent to reach $2.2 trillion at the end of Q4-2022. The q-o-q change in customer deposits was broad-based with only Bahraini banks recording a marginal decline during the quarter while most of the other country aggregates showed growth. The net impact of stronger lending growth and a slightly smaller customer deposit growth was a marginal growth of 30 bps in the aggregate GCC loan-to-deposit ratio at the end of Q4- 2022. Moreover, despite the growth, the ratio remained below the 80 per cent level and at one of the lowest quarterly levels at 79.3 per cent.
Strong credit growth
Credit growth in the GCC remained strong during Q4-2022 despite higher interest rates, indicating strong economic activity and business confidence in the region. Manufacturing activity data from Bloomberg (Markit Whole Economy Surveys) showed PMI figure at one of the highest levels recorded recently for Saudi Arabia at 59.8 during February-2023 and elevated in the case of UAE at 54.3 and 51.9 for Qatar. Central bank data on credit growth in the region showed higher q-o-q lending for all
regional central banks barring Bahrain which reported a decline of 2.2 per cent and the UAE, which reported a marginal drop of 0.2 per cent.
GCC central banks' data showed that after months of marginal activity, Qatari banks reported the biggest lending growth during the quarter at 3.5 per cent during Q4-2022 as compared to a decline in lending during the previous quarter. Saudi Arabia continued to report strong growth during the quarter at 1.4 per cent, although the pace of growth declined considerably and was the smallest since June-2019.
The growth in the case of Kuwaiti banks was also modest at 0.9 per cent q-o-q and was the smallest growth since Q4-2020 Aggregate credit facilities in Qatar reached QR1.3 trillion at the end of Q4-2022 mainly backed by 9 per cent growth in lending to the Real Estate sector followed by 5.5 per cent and 5.4 per cent growth in lending to Services and Public Sector. A decline in lending to Industry (-4.4 per cent) and Consumption (-2.5 per cent) partially offset the overall growth in domestic lending.
Data from the Saudi Central Bank showed growth in lending to Utilities and Health Services, Transportation & Communication, Finance and Real Estate that was offset by a decline in lending to Manufacturing & Processing and Agriculture & Fishing industries.
