Gulf's biggest banks get profit boost thanks to higher net interest income in Q2

The Gulf Cooperation Council's five largest banks posted a rise in profitability in the second quarter as rate hikes by the region's central banks boosted lenders' net interest income.

The United Arab Emirates' First Abu Dhabi Bank PJSC and Emirates NBD Bank PJSC, Saudi Arabian lenders The Saudi National Bank and Al Rajhi Banking & Investment Corp., and Qatar National Bank QPSC posted a year-over-year rise in net income, S&P Global Market Intelligence data shows.

Saudi National Bank recorded the biggest increase, with its $1.22 billion profit nearly double that of the year-ago quarter. Only First Abu Dhabi Bank failed to grow profit on a quarter-over-quarter basis.

Emirates NBD had the largest increase in net interest income, or NII, in the quarter, with a 26.1% rise to $1.40 billion. The lender primarily attributed the increase to improved loan and deposit mix, with higher interest rates feeding through to margins. The bank noted it was "extremely well positioned" for further rate rises.

First Abu Dhabi Bank posted a 21.1% year-over-year NII increase to $920 million, while Qatar National Bank's NII rose 23.1% to $1.92 billion. Saudi National Bank and Al Rajhi also saw NII grow over the period, by 15.3% and 9.6%, respectively.

GCC banks' profitability is expected to improve due to the confluence of lower cost of risk and higher interest rates, according to S&P Global Ratings. In line with the July rate hike by the U.S. Federal Reserve, the central banks of Saudi Arabia, Qatar, the UAE, Bahrain and Oman raised their benchmark interest rates by 75 basis points. Kuwait's central bank increased its key rate by 0.25 percentage points in July, and again in August.

Rate hikes are anticipated to continue in 2022. Higher oil prices are also contributing positively to the banks' operating environments, Ratings said.

In Saudi Arabia, rising oil prices and production are propelling both government budget and economic growth, Ratings noted. Some of the government's projects under its Vision 2030 strategy to diversify the economy are also expected to create growth opportunities for the banking sector.

Asset quality in Qatari banks will likely deteriorate, but only slightly, as the government unwinds its support program, Ratings said, noting that the withdrawal of support by 2022-end could show the COVID-19 pandemic's impact to have been more severe than previously estimated. Ratings also expects rate hikes to translate into wider net interest margins.

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The improving economy in Bahrain and the UAE is expected to cushion banks' asset quality and profitability, according to Ratings. Higher oil prices will support the economic recovery in Bahrain and Kuwait throughout 2022.

In Kuwait, however, the commercial real estate sector might become banks' most likely source of nonperforming loans, but the rating agency noted that it generally anticipates a slight reduction in the banking sector's nonperforming loans ratio over the next 12 to 24 months.

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