Banks in the GCC region reported a surge in profitability in the final quarter of 2023, buoyed by higher interest rates and a strong project pipeline that fuelled credit growth, according to a report by Kamco Invest.

The analysis of 58 listed lenders found net interest income hitting a record high in Q4-2023 as banks benefited from a rise in borrowing costs. This, coupled with continued lending activity in most markets, pushed overall profitability to new highs for the year.

All country aggregates in the GCC showed growth in lending during the quarter that came after mixed trends during the previous quarter. The growth once again reflected a robust projects market pipeline in the region with recent reports showing governments now looking at funding support in the form of debt issuances to support the ongoing activity.

On the liquidity front, customer deposits increased at an equivalent pace of 2.1 per cent quarter-on-quarter to reach $2.39 trillion at the end of Q4-2023, once again led by growth in deposits in all markets in the GCC.

However, the report also highlighted some potential headwinds. While customer deposits grew for the eleventh consecutive quarter, reaching a new peak in Q4, the cost of funds for banks also climbed significantly. This could squeeze net interest margins in the future, especially with the global interest rate outlook remaining uncertain.

The US Federal Reserve is now expected to make fewer rate cuts than initially anticipated, while the European Central Bank (ECB) plans multiple reductions this year. This divergence in monetary policy across key economies could create challenges for GCC banks.

Other key findings include: The loan-to-deposit ratio remained below 80pc for the seventh consecutive quarter, indicating banks are keeping pace with lending growth.

Operating expenses rose for the second straight quarter, but at a slower pace compared to Q3.

Loan loss provisions increased as expected at year-end, but the cost of risk remained low. Return on equity (ROE) stayed elevated at record levels in Q4-2023.

Looking ahead, the report suggests a positive near-term outlook for the GCC banking sector, supported by high oil prices and strong lending activity.

However, it emphasises the need to monitor factors like diverging global monetary policies, increasing cost of funds, and potential pressure on net interest margins.

avinash@gdnmedia.bh

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