GCC Banks’ Credit Expansion Remains Strong in Q2 of 2023

Credit expansion in the Gulf Co-operation Council (GCC) banks remained strong during the second quarter of 2023 despite interest rates reaching decades-high levels following rate hikes in the US, according to a report from Kuwait-based Kamco Invest.

The aggregate outstanding credit facilities in almost all the countries in the GCC showed sequential growth during the quarter mainly led by a robust projects market pipeline as well as government efforts to reduce the impact of higher interest rates.

Moreover, several new big-ticket projects and reform initiatives were announced in the GCC giving further boost to corporate lending, the report said.

Aggregate gross loans for GCC-listed banks reached a new record high of $1.9 trillion at the end of Q2 of 2023. The q-o-q growth stood at 1.9% or $36.3 billion backed by growth in all markets in the GCC. Similarly, aggregate net loans showed a slightly smaller growth of 1.7% during the quarter to reach $1.8 trillion.

Among them, Saudi-listed banks reported the strongest q-o-q growth in lending at 2.7% to $640 billion at the end of Q2 of 2023. Bahrain-listed banks were next with a growth of 2.5% in gross loans that reached $58 billion followed by the UAE-listed banks with a growth of 2.1% to $529 billion. Banks in Kuwait, Qatar and Oman reported slightly smaller growth in gross loans during the quarter.

On the liquidity front, customer deposits increased at a smaller rate of 1.0% q-o-q to reach $2 trillion after a decline in customer deposits in Qatar and Kuwait was more than offset by higher deposits in the rest of the markets.

“The net impact of faster growth in gross loans vs. customer deposits was a slight growth in the aggregate loan-to-deposit ratio for the GCC that reached 79% at the end of Q2-2023,” the report noted.

Total net income reached $13.7 billion with a q-o-q increase of 3.5% supported by both higher net interest income and non-interest income during the quarter. Higher interest rates supported net interest income during the quarter. A decline in loan loss provisions from $3 billion to $2.7 billion also supported bottom-line performance.

Customer Deposits

Customer deposits in GCC banks showed a smaller growth in the last few quarters resulting in a small and gradual increase in the loan-to-deposit ratio. Since core customer deposits form the backbone for funding for GCC banks, recent reports had pointed out liquidity issues with banks in some GCC countries.

However, almost all central banks in the GCC have recently affirmed adequate liquidity in the banking sector and have reiterated continued support to the sector. An S&P report also pointed to the strong and stable funding profile of banks in the region in the form of customer deposits as well as reliance on external funding in case of stress on the liquidity front.

Recently, the governor of Saudi Central Bank – SAMA – highlighted the strong liquidity and capitalisation of banks in the Kingdom and stressed that lending risks remained moderate in the Kingdom and all the precautionary ratios for the banking system have exceeded the requirements as per the Basel norms.

Increase in Net Interest Margin

The aggregate net interest margin (NIM) reported by the GCC-listed banks increased for the third consecutive quarter during Q2-2023 to 3.2% compared to 3.1% the previous quarter.

The increase reflected elevated net interest income during the trailing twelve-month period adding additional rate hikes since the start of 2022. A smaller increase in earning assets also contributed to the growth in NIMs.

The q-o-q growth in NIM was seen across the GCC banking sectors barring Qatar which reported a marginal decline during the second quarter.

The UAE-listed banks showed the biggest improvement in NIMs during the quarter with an increase of 16 bps to 3.44%, followed by Saudi Arabian banks at 3.23% and 3.05% by Qatari banks during Q2 of 2023.