MENA Banks Remain Optimistic Towards Year End
Elena Sanchez, Managing Director and Co-Head of Financials and Banking at EFG Hermes Research, provides key insights into the banking sector in MENA.
New research by EFG Hermes has found that in the banking sector, the current credit quality backdrop is generally favorable, with short-term macro being supportive in the GCC. However, higher borrowing costs and a challenging global economic environment pose potential risks in 2023. In the medium term, infrastructure spending, a push towards greener economies, and potential legal reforms, will all contribute towards loan growth. Here are some of our detailed country insights.
Saudi Arabia is facing a slowdown in mortgage growth due to base effects, rising interest rates coupled with a tightening supply of affordable homes. Despite the slowdown short-term, mortgages’ long-term prospects are attractive, as the population is young, women’s participation in the workforce is rising, and there is still room for increase in homeownership relative to the country’s Vision 2030 targets. Banks are generally upbeat on the SME opportunity as an additional area of growth.
Meanwhile, the U.A.E.’s rollout of 10-year golden visas clubbed with a recovery in hospitality, real estate, and aviation has led to buoyancy in terms of loan growth and credit quality. Also, retail credit appetite remains strong. Corporates leveraging up post IPOs and the U.A.E.’s goal of transitioning towards clean energy and net-zero emissions are seen as a long-term credit growth drivers for the country.
In Kuwait, a positively developing political climate could bring long-awaited legal reforms. There is increased optimism as a result of better collaboration between the legislative and executive powers leading to the passing of key pending reforms. This includes the Debt Law and the Mortgage Law, which is key, due to the current difficult access of young Kuwaitis to housing. The recent approval of the 2022/23 budget could also unlock corporate loan growth opportunities in 2023 via the implementation of government projects.
Qatar’s increased LNG production capacity for 2025-2027 and enhancement of the country’s infrastructure will bolster the economy. Loan growth prospects look better for 2023 than 2022, which has been negatively impacted by government repayments. However, Qatari banks’ net interest margins may face some pressure in 2023 as the regulatory authority is encouraging banks to reduce foreign currency deposits. Also, for some banks, the cost of risk may be elevated in the second half of 2022-2023 because of the Qatar Central Bank’s comprehensive loan review.
Egyptian banks could see a slowdown in underlying credit growth in 2023 after a strong 2022, as higher and higher interest rates may dent consumer demand. Credit quality has been resilient in the corporate and retail loan segment although higher borrowing rates and difficulties on certain imports may impact credit quality in the SME segment. The recent downward adjustment of the Egyptian Pound should not lead to material credit quality pressure for banks due to strict regulations in place on foreign currency borrowing.