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Strong results likely from Gulf banks – but there’s more to success than profit

Expect healthy returns for 2023, yet look beyond the financials for 2024

Gulf banks results Sharjah Islamic bank Soeren Stache/dpa via Reuters Connect
Sharjah Islamic Bank is one of several Gulf financial institutions that have already reported good results for 2023, with profits up sharply

GCC banks have begun reporting their full year results for 2023. The expectation is that most will have performed strongly, reporting higher profits and large capital cushions, continuing a trend seen in their half-year and third-quarter results. 

Rising global interest rates have enabled banks worldwide to increase their net interest margins.

Five of the six GCC currencies are pegged to the dollar, so the region’s central banks have usually tracked the hikes in the US that began in early 2022 and continued last year. The Kuwaiti dinar is pegged to a basket of currencies, and the Central Bank of Kuwait has also been raising rates in line with international trends.

Qatar National Bank (QNB), one of the largest banks in the Middle East, for example, reported an 8 percent increase in net profits and Qatar Islamic Bank a 7 percent increase. Net profits at Bank Muscat were up 6 percent and those at Sharjah Islamic Bank also increased sharply.

So is everything in the garden rosy? Yes – but there are some caveats.

The detail contained in full year results, as opposed to quarterly reporting, will enable us to see whether higher interest rates are leading to an increase in problem loans as customers struggle with higher interest payments, compromising the benefits received from higher interest margins. 

Under IFRS 9, a reporting standard introduced a few years ago, banks must make provisions against anticipated loan losses, even if customers are still repaying all interest and principal on time. 

It will be hard for banks to argue that their loans have the same likelihood of being paid in full after the sharp increase in rates over the past year.

Most central bank benchmark rates are now around 5-6 percent in the GCC, compared to less than 1 percent for nearly all of the past 15 years. Of course, commercial customers pay much higher interest than central bank benchmark rates.  

For some banks, difficult economic conditions in Egypt and Turkey may depress profits.

QNB’s earnings were reduced by a significant loss due to hyperinflationary conditions in Turkey. With a cumulative inflation rate greater than 100 percent over the past three years, Turkey is classified as “hyperinflationary” under international accounting standards, with the result that the bank must re-value many of its assets and liabilities that are domiciled there. Through its ownership of QNB Finansbank, QNB has more than 400 branches in Turkey. 

It will be interesting to see how conditions in Turkey affect the results of Kuwait Finance House, which also has significant operations in the country. 

Exposures to Lebanon are also hyperinflationary under international accounting standards, but the Lebanese crisis has now lasted so long that most banks that were exposed have now cut or closed their positions. 

More positively, only two of the 62 active commercial banks in the GCC declared losses in 2022 – the last year for which we have a full set of results – and the majority showed increases in both operating and net profits. 

The GCC now contains hardly any “zombie banks” – poor performers with no chance of recovery – partly because in recent years weaker institutions have been acquired by or compulsorily “merged” with stronger and larger neighbours. 

Looking ahead, we can reasonably hope for more strong performance from GCC institutions.

The performance of all banks is driven primarily by economic conditions in their home markets.

Last month, the IMF predicted that economic growth in the GCC would be twice as strong in 2024 as in 2023: 3.7 percent compared to just 1.5 percent.

All six economies will perform more strongly, according to the Fund, with growth in Saudi GDP set to rise to 4 percent from 0.8 percent and in Kuwait to 3.6 percent from negative 0.8 percent. 

Of course, all GCC economies, and their banks, are heavily dependent on the price of oil, which is hard to predict. Slowdown in China and the resulting drop in demand for crude oil could send prices lower, while disruption of trade routes due to war in the Middle East would drive it higher. 

Financial performance is fundamental for all banks – chronically loss-making banks do not survive – but success is now being judged through many different factors, which may, or may not, reflect or impact profitability.

These include a bank’s support for local communities; adaptation to climate change and involvement with sustainable finance; a robust compliance and anti-financial crime culture; and a strategy on digital finance that includes the opportunities presented by AI.

Over the long term, these factors will determine profitability and success as much as rising interest rates and net interest margins. 

In the weeks ahead, we will see many GCC banks declaring healthy profits for last year.

We will of course welcome those announcements, but we will also be looking ahead at the broader landscape in which banks are operating, and asking how well GCC banks are positioned for the strategic opportunities and challenges of the future. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems

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