In the aftermath of Russia’s invasion of Ukraine last year and the imposition of stringent sanctions on Russian oil and gas, commodity markets were rocked, and prices soared. The price of brent crude went up almost 50% between January and March alone, going from around $78 a barrel to over $115. This rise is even more astonishing when one considers that during the lows of the pandemic only a year or so previously, crude oil briefly traded below $0.
The rewards reaped by the oil exporters of the Gulf Cooperation Council (GCC) were immense. The International Monetary Fund (IMF) predicted they would be in line for a revenue windfall of roughly $1 trillion, even as commodity prices stabilised and eventually dropped towards the end of the year as the world faced a possible recession.
One might expect this huge influx of cash to be a positive development for financial markets in the Gulf – what could be more welcome than free money? However, particularly when it comes to the region’s banking scene, this isn’t quite how it played out.
Akber Khan, acting Chief Executive Officer at Al Rayan Investment in Doha, told Disruption Banking that additional oil revenues have been used by the government to pay down its debt rather than to spend more on infrastructure and other projects to stimulate economic growth. In turn this means less banking activity and restricted profits for banks.
“Historically, government spending in the region has been driven by oil prices,” he said. “But this time around, across the Gulf, governments have used the extra revenue from higher energy prices to pay down their debt. This cuts down balance sheet growth. In addition, higher interest rates have raised the cost of funding, holding back margin growth.”
These tougher conditions for Gulf banks have been reflected in poor performance on stock exchanges across the region. Riyad Bank is down 5% on the Saudi Tadawul since January, as is its counterpart Bank Albilad. First Abu Dhabi Bank is down almost 20% since the start of the year. Qatar Islamic Bank is down over 22% compared to this time last year, with Doha Bank posting losses of more than 30% over the same period. The list goes on and on across the Gulf.
There are some banks that have avoided this fate, such as Emirates NBD in Dubai, but the broader trend is clear. Banking stocks were further rattled by the collapse of Credit Suisse and Silicon Valley Bank earlier in the first quarter, reinforcing negative sentiment. While this was a significant issue globally, the Gulf was particularly exposed to Credit Suisse in particular, given several of the region’s banks had taken out large stakes in the Swiss giant in the months prior to its downfall.
However, despite these short-term losses, there are reasons to be optimistic about the future growth of banking stocks in the Gulf. Indeed, Khan is confident that this year’s downturn is simply down to “some valuations having got ahead of themselves” and sees any self-offs as a buying opportunity.
Jai Doshi, a portfolio manager at a prominent family office in Dubai, told Disruption Banking that the region’s banks remain intrinsically sound despite conditions this year. Taking Saudi Arabian banks as an example, he said “looking at the fundamentals, the price to earnings ration is at 18 times trailing 12-month (TTM) earnings.” High TTMs can be seen as indicating strong growth prospects.
“There has been a pullback in the past few weeks, likely driven by a combination of volatile oil prices and corporate earnings coming it at mixed levels, but it’s hard to really pinpoint specific reasons for the declines,” Doshi added, “but broader developed markets, including MSCI World and the S&P500, have also posted declines so there is also likely to be some knock-on impacts from these.” The US debt ceiling crisis played a particularly important role in leading stock market declines globally.
It’s clearly a difficult time for banks in the Gulf. While in many ways the decisions of national governments to pay down their debts rather than commit to more spending makes economic sense, particularly in a tricky global macroeconomic environment, this has clearly had ramifications for the region’s banking sector. Most analysts appear to be confident, however, that brighter times will lie ahead for banks in what remains one of the world’s fastest growing markets.
Author: Harry Clynch
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