Big Gulf banks' lending income to stay 'elevated' after Q2 outperformance

The largest banks in the Gulf Cooperation Council posted year-over-year growth in lending income for the second quarter, as higher-for-longer interest rates continue to buoy earnings.

Dubai-based Emirates NBD Bank PJSC booked a quarterly net interest income (NII) of $2.16 billion, the highest among the five largest lenders by assets in the Gulf Cooperation Council (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.

Qatar National Bank QPSC, the largest bank by assets in the sample, reported an NII of $2.12 billion, up from $1.93 billion a year ago. Qatar National Bank and Emirates 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 in emailed comments.

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% in early August.

All five 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 7.06 billion United Arab Emirates dirhams, which it said was the first time its quarterly net profit exceeded 7 billion dirhams. Al Rajhi's 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.

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.

The US Fed's next monetary policy meeting is in mid-September and Chair Jerome Powell has signaled that the central bank could make its first rate cut in four years. "We're getting closer to the point at which it'll be appropriate to reduce our policy rate," the Associated Press quoted him as saying.

McKinsey recently warned in a report 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."

"Executives should not assume that the current high-interest-rate environment represents a new normal for bank profitability," McKinsey said in a report in late June. "Banks that leverage the temporary gains of the present to reduce costs in the future while implementing their transformative agendas are likely to enjoy a significant advantage when interest rates decline," the consulting firm said.

Banks' profits will also be backed by "range-bound impairments, in line with the trend seen in recent quarters," Kamco Invest's Ansari said.

Saudi National Bank reported quarterly loan loss provisions of about $32 million, down from $174.6 million in the first quarter. Meanwhile, Emirates NBD released provisions of $374.1 million, further boosting its earnings.

As of Aug. 16, US$1 was equivalent to 3.67 United Arab Emirates dirhams.