Kuwait, Saudi banks best in Gulf during 1st half of 2022

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Profit margins improved slightly

KUWAIT CITY, Sept 25: Standard & Poor’s credit rating agency has suggested that the profitability of banks in Kuwait, Saudi Arabia, Qatar and the UAE will reach prepandemic levels by the end of 2022, supported by high oil prices, raising interest rates and new infrastructure projects supported by regional governments, reports Al-Qabas daily. A recent report by the agency said that the return of the profitability of the region’s banks to pre-pandemic levels at the end of 2022 will support their creditworthiness, as it is likely that the higher net interest margins of the region’s banks in the second half will compensate for the high risk costs, which will make Gulf banks achieve profits for the entire 2022 year stronger than 2021.

The Standard & Poor’s report expected the stability of risk costs in the region’s banks in 2022, partly due to adequate provisions, but some loans that benefited from government support measures may become ineffective, noting that Gulf banks may face a less certain year in 2023 amid expectations of lower oil prices and risks to American and European economic growth. The agency pointed out that the profit margins of most Gulf banks improved slightly in the first half of this year, and among the 4 largest Gulf banking systems, Kuwaiti and Saudi banks showed the strongest semi-annual performance this year, as their profits in the first half reached pre-pandemic levels, while it will take Banks in Qatar and the UAE take longer to recover.

The Standard & Poor’s report indicated that the rise in oil prices and the economic recovery led to faster growth in lending in Kuwaiti banks and to lower risk costs. The strong profits of Kuwaiti banks in the first half are mainly due to a further decrease in risk costs and a growth in lending by 9%, in conjunction with the rise in oil prices, the recovery of Kuwait’s economy and the improvement of the operating environment. However, Kuwaiti banks saw profit margins in the first half that were lower than the agency’s expectations, amid increased competition in bank lending in the country.

Non-interest
The non-interest income of Kuwaiti banks continued to benefit from the improvement in the operating environment in the first half, however, the rise in inflation and the resumption of payment of some costs with the receding of the pandemic led to an increase of 10% in the operating costs of Kuwaiti banks in the first half. Standard & Poor’s expected the cost of risk for Kuwaiti banks to continue to decline to 0.85% in 2022 from 0.9% in 2021, partly due to coverage of non-performing loans by the Kuwaiti banking sector by about 200%, adding: However, the bank lending momentum is likely to slow.

In the second half, while the profit margins of banks will improve slightly in the same period. The agency also expected a slight rise in non-performing loans in the second half, due to continued pressure from oversupply in the commercial real estate sector (mostly office space), but at a lower level than last year. The agency’s report indicated a decrease in the second stage loans (loans with high credit risks) from 9.6 percent in the first half of last year to 7.9 percent in the first half of this year, and a decrease in the third stage loans (nonperforming loans) from 2.5 percent in the first half from 2021 to 1.4% in the first half of 2022, in light of an improved operating environment for Kuwaiti banks this year.

While Standard & Poor’s expected a recovery in residential and commercial real estate prices in Kuwait in the next stage, it stressed that concerns in the real estate sector lie in other parts of this market, which may impede the quality of banks’ assets in Kuwait, noting that the rate of exposure of Kuwaiti banks to The real estate and construction sector amounted to 25% of the total lending in the first half of this year. She said: We understand that part of this exposure is due to companies with diversified financial flows, and therefore we expect non-performing loans to the real estate sector to diminish in the second half.

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