Consumption lending in Qatar is likely to see the strongest growth, buoyed by the FIFA World Cup at the end of the year and positive sentiment stemming from high natural gas prices, according to Standard & Poor's (S&P), an international credit rating agency.
However, the rating agency expects the overall private sector credit to grow 5% in 2022, less than half the average rate seen over the previous three years.
The government construction projects, the main growth spur previously, have mostly been completed, which is shown in banks' first-half performance. Overall credit could reduce slightly if lending to the government continues to decline in the second half, which "we view as likely given our projected fiscal surplus of about 12% of GDP (gross domestic product)", it said.
Finding that banks' "significant" exposure to the wealthy public sector will continue to support solid asset quality; S&P said its projections anticipate that central bank rate hikes, following those by the US Federal Reserve, could pressure some Qatari borrowers, with a marginal effect overall.
However, high inflation in Turkey, and to a lesser extent Egypt, will likely be more material contributors to cost of risk over 2022, which it still estimates at pandemic levels of about 100bps or basis points.
"As a result, we expect an NPL (non-performing loans) increase toward about 3.6% of total loans this year from 3.2% at year-end 2021," S&P said.
Net interest margins are expected to further widen this year. However, along with higher funding costs, hyperinflation-related adjustments stemming from Qatari banks' presence in Turkey will slightly constrain net income growth, according to the rating agency.
"Still, on balance, we expect these trends to provide positive momentum, supporting solid capitalisation," the rating agency said.
Stressing that a key system vulnerability – its large stock of external debt – is likely to continue reducing over the rest of 2022; it said both lower demand and the introduction of new prudential regulations to discourage non-resident-driven balance sheet growth led to a nearly 25% reduction in non-resident funding in the first half compared with year-end 2021, which was offset by an increase in interbank lending.
In turn, the stock of external liabilities declined about 6% and "we expect this trend to continue for the rest of the year. However, replacing non-resident deposits with domestic sources, which has been very visible in the corporate sector so far over 2022, will likely increase overall funding costs," it said.
Elsewhere in the Gulf Cooperation Council; S&P said the earnings from most regional banks will reach almost pre-pandemic levels by year-end 2022, amid high oil prices and rising interest rates, supporting their creditworthiness.
"In the second half, we forecast a more visible strengthening of regional banks' interest margins and a manageable pick-up in cost of risk, amid lingering effects from the Covid-19 pandemic via loans that benefited from support measures and were then restructured. Combined, these factors will be a net positive for banks' earnings," it said.