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Top GCC banks income to stay ‘elevated’ after Q2 outperformance

Gulf banks have benefited from rising interest rates over the past two years

Published: Tue 20 Aug 2024, 8:31 PM

By
Issac John

Dubai-based Emirates NBD booked a quarterly net interest income (NII) of $2.16 billion, the highest among the five largest lenders by assets in the GCC. — File photo

Lending income of leading Gulf banks will stay ‘elevated’ after outperformance in the second quarter as higher-for-longer interest rates continue to buoy earnings, S&P Global Market Intelligence said.

Dubai-based Emirates NBD booked a quarterly net interest income (NII) of $2.16 billion, the highest among the five largest lenders by assets in the GCC. This was up from $1.97 billion a year earlier and $2.02 billion in the first quarter. NII is the difference between interest earned on loans and that paid out on deposits, S&P Global Market Intelligence said in a report.

Banking analysts argue that profitability of GCC banks will remain strong in 2024, and their asset quality will stay robust despite higher-for-longer rates, due to supportive economies, contained leverage, and a high level of precautionary reserves.

They noted that while rising inflation, rapid interest rate hikes, and geopolitical tensions are roiling the global banking sector, GCC banks are proving resilient. Gulf banks have benefited from rising interest rates over the past two years and are expected to continue reaping these benefits in 2024. By the end of 2023, the average return on assets for the largest 45 banks in the region reached 1.7 percent, up from 1.2 percent at year-end 2021.

S&P’s Global Market Intelligence report said Qatar National Bank, the largest bank by assets, reported an NII of $2.12 billion, up from $1.93 billion a year ago. Qatar National Bank and Emirates NBD both have significant operations in Turkey.

Saudi National Bank and compatriot Al Rajhi Banking & Investment Corp, both arguably more domestically focused than the other sampled banks, also posted higher NII at $1.88 billion and $1.56 billion, respectively. First Abu Dhabi Bank PJSC generated $1.34 billion, rising year over year from $1.21 billion.

“The higher NII reflected consistent credit growth in the region coupled with elevated interest rates,” said Junaid Ansari, director of investment strategy and research at Kamco Invest. NII is expected to stay high in the third quarter as interest rates are likely to be unchanged for most of the period, Ansari said.

All five GCC banks reported higher quarterly net income, with Emirates NBD reporting the highest at $1.92 billion. In local currency, the bank’s net income was Dh7.06 billion, which it said was the first time its quarterly net profit exceeded Dh7 billion. Al Rajhi’s income also grew to $1.25 billion from $1.11 billion a year ago. The growth was less pronounced at Qatar National Bank, First Abu Dhabi and Saudi National Bank.

All currencies in the GCC are directly or indirectly pegged to the US dollar and any rate action by the US Federal Reserve is mirrored by the region’s central banks. The Fed has been raising interest rates to battle inflation and held its key interest rate at a 23-year peak of 5.3 per cent in early August.

Further into 2024, potential steep rate cuts — some estimates point to easing of close to 100 basis points — would affect NII in the final quarter of the year, Ansari said. Yet, banks could get some cushion from continued credit growth supporting overall lending. “All countries in the GCC are serious about infrastructure investments and this should drive funding market growth,” Ansari said.

McKinsey said in a report that despite global economic uncertainties, the robust operating environment in the GCC has propelled its financial institutions to outperform their international counterparts in 2023, a trend expected to persist.

Global banking faces many challenges, including rising inflation, rapid interest rate hikes, and geopolitical tensions. These factors have contributed to a 10 per cent decline in the price-to-book ratio and a significant $900 billion drop in global banking market capitalisation.

In contrast, the McKinsey report portrays a positive outlook for the GCC banking sector. It emphasizes that banks in the region have achieved “exceptionally high return on equity and some of the largest multiples worldwide.” This success is attributed to effective capital management and robust profitability strategies.

GCC banks have consistently maintained a higher return on equity and stronger market multiples than their global counterparts. Their advantage in efficient capital management is evident, with a 3-4 percentage point lead in ROE over the past two years, McKinsey analysts said.

Elevated interest rates, while posing challenges for global banks, have proven advantageous for GCC institutions. They have capitalized on record-high regional and international banking profits, generating substantial shareholder value. GCC banks also exhibit superior net interest margins and revenue-to-assets ratios compared to the global average, they noted.

However, McKinsey warned that the GCC banking sector’s “remarkable performance” in the past year, largely thanks to high interest rates, “could foster complacency among bank managers and sap their will to implement ambitious transformation agendas”.