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Some of the favourable tailwinds that made 2022 so profitable for Gulf banks are still around. Image Credit: Shutterstock

Past mid-January, Gulf banks started announcing their 2022 financials, and confirming expectations of spectacular-to-strong results due to a number of contributing factors. The decision to gradually raise interest rates to 4.5 per cent in the past year provided for higher topline numbers, despite in some case these rates limiting borrowing demand.

However, it also generated more revenue from the credit volumes offered to diverse businesses and as personal loans.

Secondly, higher oil prices and the resulting revenue gains led to a significant growth in local liquidity from increased spending and government deposits from oil surpluses. Some of these were deposited at local banks, while others were invested in various assets such as bonds, stocks, projects, and overseas.

Inward inflows

A third factor was Gulf banks attracted sizeable capital from abroad, especially from regions undergoing tensions, thus providing for a significant cash inflow. A fourth dimension was the progress in overcoming COVID-19, along with the resumption of economic activities in aviation, retail, tourism, and services, which helped fuel demand for credit and loan expansion. These resulted in an improvement in the size and strength of the banking sector’s performance. The UAE's mega-bank FAB saw a 7 per cent increase in profits (to Dh13.4 billion) which led to a 52 per cent cash dividend proposal.

Dubai's Emirates NBD bank maintained its record-breaking performance, with a 40 per cent increase in profit in the past year. It also decided to approve cash dividend of 60 fils per share, after earning profits of Dh13 billion. In fact, the fourth quarter of the year was particularly significant in determining banks’ performance.

Gulf banks’ ascendance

In Saudi Arabia, Al Rajhi Bank, the second largest in Saudi Arabia, achieved a 16 per cent increase in profit, reaching SR17.15 billion ($4.6 billion) compared to SR14.7 billion in 2021. In Kuwait, the country’s largest bank, NB achieved a significant surge in profit by 40 per cent, to KD509 million ($1.66 billion), compared to KD362 million in 2021. That of Qatar National Bank grew 9 per cent to QR14.3 billion compared to QR13.2 billion the previous year, and the bank decided to distribute profits to shareholders by 60 per cent. The performance of Bahraini and Omani banks aligns similarly with the strong performance of Gulf peers.

In the coming phase, the performance of banks in the GCC will be impacted by the presence of non-performing and doubtful loans, resulting from defaults and clients’ inability to fulfill their obligations. However, some of these banks have managed to significantly reduce non-performing loans in the past year, such as NBK, which reduced it by 67 per cent. Nevertheless, non-performing and doubtful loans still constitute a burden for Gulf banks.

It is expected that Gulf banks will continue to improve their performance and lead to additional gains for shareholders, and in turn contribute to supporting economic and public financing. A positive would be a slower growth in interest rates.