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The three sources of risk GCC banks must look out for in 2023

The cost of risk in the Gulf is expected to normalise and bank earning levels should recover to near pre-pandemic levels by the end of 2022

Money, Person, Baby Reuters
The move aims to support the central bank's liraisation targets in commercial activities

Gulf bank earning levels are set to recover to near pre-pandemic levels by the end of 2022, thanks to high oil prices and improving regional economic sentiment.

What’s more, the cost of risk is expected to return to normalised levels for most countries and higher interest rates are set to support banks’ bottom lines.

Looking ahead to 2023, we anticipate three main sources of risk for the GCC banking sector. 

First, the expected slowdown of the global economy could impact the region, primarily through weakened commodity prices. Under our base-case scenario, we assume the Brent oil price will average $85 per barrel in 2023 and $55 in 2024 and beyond, resulting in lower growth for the GCC economies and fewer opportunities for their banking systems. 

Second, the GCC banking sector’s exposure to riskier countries could throw a spanner in the works.

A few GCC banks have ventured into countries with higher credit risk, particularly Turkey and Egypt. Given the significant challenges these two countries face, we expect to see some impact on banks in the region.

In Turkey, for example, the lira’s depreciation has resulted in significant unrealised losses for exposed GCC banks. 

Finally, applying International Accounting Standard 29 on financial reporting in hyperinflationary countries has hit the bottom line of exposed Gulf banks.

The impact has been manageable so far and banks have benefited from revaluation gains on their non-monetary position, reported in comprehensive income. However there may be potential liquidity constraints for banking growth as local and global liquidity becomes less abundant.  

Risk outlook for Qatar

Looking specifically at Qatar amid the backdrop of the World Cup, its credit growth has slowed down as the major projects in the government’s masterplan, including the tournament’s infrastructure projects, have been delivered and the pace of development is expected to slow. 

Meanwhile, Qatar’s private sector credit growth is expected to witness a low to mid-single digit increase in 2022, which is significantly below the average rate seen over the previous three years.

Consumer lending specifically is likely to see the strongest growth, buoyed by the football at the end of the year and positive sentiment stemming from high natural gas prices. 

Qatari banks’ significant exposure to the wealthy public sector will continue to support solid asset quality. The central bank rate hikes, following those by the US Fed, are anticipated to have an impact on some Qatari borrowers, with a marginal effect on asset quality overall. 

However, hyperinflation-related adjustments stemming from Qatari banks’ presence in Turkey and, to a lesser extent, Egypt, will likely contribute to risk over 2022.

As a result, we expect non-performing loans to increase toward about 3.5% of total loans this year from 3.1 percent at year-end 2021.

Dr Mohamed Damak is a senior director and global head of Islamic Finance at S&P Global Ratings