Analysts expect ‘mixed’ picture from Gulf banks’ Q3 results

October 23, 2024, 2:31 PM

Analysts are expecting 'pockets of margin pressure, particularly in Saudi Arabia', but higher Q3 revenues for most Gulf banks

Lending growth ‘very solid’
Pressure on net interest margins
Big profit rise for Kuwaiti banks

The Gulf’s largest banks are likely to report mixed earnings for the third quarter, analysts say, as pressure on margins lessens the benefit of lending growth.

Qatar National Bank and Dubai’s Emirates NBD – the Middle East and Africa’s largest and fifth largest banks by assets – have already published Q3 results. QNB’s profit rose 6.6 percent year on year to QAR4.6 billion ($1.25 billion) while Emirates NBD’s profit was near-flat at AED5.23 billion ($1.4 billion).

Rahul Bajaj, director of Mena equity research at Citi in Dubai, is expecting “mixed” Q3 results from the 15 Gulf banks he covers.

“Saudi and UAE banks will continue to lead in terms of revenue growth,” says Bajaj. “There will be pockets of margin pressure, particularly in Saudi Arabia, although most banks across the region will report higher revenue on both a quarter-on-quarter and year-on-year basis.”

Net interest margin is the spread between the interest rate a bank pays on customers’ deposits and what it levies on borrowings.

A branch of Qatar National Bank in Doha. Its Q3 profit rose to $1.25bn

Lenders in Saudi Arabia are set to report the biggest increase in quarterly loan growth at 10.9 percent, according to Egyptian investment bank EFG Hermes. Next is the UAE at 10.2 percent, Qatar at 7.4 percent and Kuwait at 5.5 percent.

“The big positive in Q3 will be lending growth, which will remain very solid across most banks and markets,” says Bajaj.

Among the GCC countries, Kuwaiti banks are expected to post the biggest year-on-year profit increases for Q3, according to EFG Hermes.

Lower cost-of-risk – the expenses that banks incur in managing loan defaults – will help Kuwaiti lenders report a combined 17 percent rise in third-quarter profits, it says.

EFG is also predicting lending growth and steady margins for Kuwaiti banks and says they “are generally optimistic on the outlook for credit growth”.

EFG is expecting banks’ combined Q3 profits to rise by 6 percent in Saudi Arabia and 3 percent in the UAE.

Qatari banks’ quarterly profits will increase by a more tepid 2 percent. EFG says this is partly down to the country’s lenders reporting an exceptional third quarter in 2023 and to a decline in net interest margins.

Corporate borrowing drives Saudi loan growth

A Citi analysis of Saudi Arabia Central Bank data for July and August indicates that lending will increase by 4 percent in Q3 versus Q2.

“That would be the highest sequential growth since Q2 2022,” says Bajaj. “Corporate borrowing remains the main driver of Saudi loan growth, although retail lending including mortgages is also picking up again.”

Saudi mortgage lending is expected to increase by about SAR6.8 billion ($1.8 billion) per month in the third quarter, Citi estimates. That equates to a sequential and year-on-year increase of more than 10 percent, says Bajaj.

Net interest margins trends will vary. EFG expects consumer-focused Al Rajhi Bank to report improved margins while HSBC affiliate Saudi Awwal Bank, which specialises in corporate lending, and Arab National Bank are set to show slimmer margins.

EFG’s picks among the kingdom’s bank stocks are Saudi National Bank and Al Rajhi. This is down to improving margins for both lenders, plus increased consumer borrowing at Al Rajhi.

Corporate tax tipped to dent UAE profits

Emirates NBD reported flat third-quarter profit as higher taxes and impairments offset increases in net interest income and fees and commissions.

Cost-of-risk at Gulf banks has been abnormally low in recent quarters. It is likely to rise, says Citi’s Bajaj, pointing to Emirates NBD’s higher provisions from its Turkish unit in the third quarter.

EFG’s preferred UAE bank stocks are First Abu Dhabi Bank and Abu Dhabi Commercial Bank because of their lower sensitivity to interest rate reductions.

Although UAE banks are likely to show bullish loan growth, their profits will probably be muted year on year because of the introduction of corporate tax in 2024, adds Bajaj.