GCC banks returning to pre-COVID-19 levels amid higher oil prices: S&P Global

GCC banks returning to pre-COVID-19 levels amid higher oil prices: S&P Global
Saudi and Kuwaiti banks showed the strongest performance among the four largest GCC markets (Shutterstock)
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Updated 23 September 2022

GCC banks returning to pre-COVID-19 levels amid higher oil prices: S&P Global

GCC banks returning to pre-COVID-19 levels amid higher oil prices: S&P Global

RIYADH: Gulf Cooperation Council banks are returning to form after a strong first half of 2022, with earnings for most of them reaching almost pre-pandemic levels by the end of the year, according to S&P Global Ratings.

This optimism is spurred by high oil prices, rising interest rates, supporting the banks' creditworthiness, along with new public-sector-backed projects, the agency said.

In the first half, margins slightly improved in most systems. 

Saudi and Kuwaiti banks showed the strongest performance among the four largest GCC markets, with earnings already almost reaching pre-pandemic levels, while Qatari and the UAE banks are taking a bit longer to recover, according to the report.

In the second half of the year, higher net interest margins will likely offset an increasing cost of risk, leaving banks with stronger full-year profits than 2021.

The cost of risk will likely stabilize at normalized levels this year, partly due to adequate provisioning.

Still, some loans that benefited from support measures may turn nonperforming, S&P said.

GCC banks face a less certain 2023, with expectations of lower oil prices and risks to economic growth in the US and Europe.

Saudi Arabia

As Saudi banks’ financial performance has almost recovered to pre-COVID-19 levels, S&P expects an average return on assets of 2 percent in 2022 compared with 2.1 percent in 2019. 

Credit to the private sector expanded 8.5 percent over the first half, due to stronger-than-expected mortgage growth, owing to market saturation and a pick-up in demand for corporate credit driven by Vision 2030 projects. 

Aggregated cost of risk remained low, at about 46 basis points, due to the strong economic rebound, and the share of Stage 3 loans remained broadly flat, estimated at about 2 percent. 

Saudi banks’ non-performing loan coverage stood at 160 percent to 170 percent in 2022. 

Higher credit growth momentum will continue into the second half of the year, mostly due to stronger-than-expected performance in the mortgage portfolio, according to S&P.

“We now expect credit growth to reach about 15 percent in 2022,” the agency said.

However, there is expectation that higher interest rates and market saturation will eventually curb mortgage origination.

S&P expects corporate lending to start contributing to loan growth, as the gradual increase in interest rates will continue to feed Saudi banks' margins, eventually pushing them up by year-end. 

Still, the cost of risk is expected to somewhat increase over the second half to 70 bps-80 bps as some of the loans restructured post-pandemic are reclassified. 

The systemwide ROA is set to stabilize at 1.9 percent to 2.1 percent from 2022. 

The increasing risk of recessions in the US and Europe, along with higher interest rates, could pressure the operating environment in the Kingdom, especially if oil prices drop. Also, higher interest rates could result in a shift away from non-commission-bearing deposits, which may pressure banks' margins.

The UAE

Higher interest rates and lower cost of risk in the UAE will support banking sector profitability, according to S&P Ratings.

Asset quality is also set to stabilize while the NPLs are expected to remain contained with the support scheme ending.

Banks' performance in the UAE improved in first-half 2022 due to lower cost of risk and higher interest rates, while the Central Bank of the UAE's COVID-19-related targeted economic support scheme also helped the system, limiting the increase in NPLs. 

At the same time, the macroeconomic environment has started to improve driven by higher oil prices and recovery in the non-oil sector.

Better operating conditions led to higher lending growth in first-half 2202 compared with 2021, although this could be tempered by increasing interest rates in the second half. 

Kuwait

Higher oil prices and the economic recovery in Kuwait have supported faster lending growth and lower cost of risk, creating a supportive environment.

Further reduction in cost of risk and higher lending growth of 9 percent year-on-year in the first half led to stronger banks' earnings.

Non-interest income continued to benefit from the improved operating environment, while higher inflation and the resumption of some costs as the pandemic wanes spurred a 10 percent increase in operating costs compared with the first half of 2021, offsetting the benefits from higher revenue.

Momentum may slow in the second half, with some NPL formation, according to S&P Global. 

Qatar

The Qatari private sector credit is set to grow by 5 percent in 2022, less than half the average rate seen over the previous three years, according to S&P Global. 

The World Cup at the end of the year along with positive sentiment stemming from high natural gas prices will push consumption lending to strongest growth.

However, government construction projects 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 the agency views as likely given the projected fiscal surplus of about 12 percent of GDP.

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EU to cut power use, levy energy companies

EU to cut power use, levy energy companies
Updated 19 sec ago

EU to cut power use, levy energy companies

EU to cut power use, levy energy companies

BRUSSELS: EU ministers on Friday agreed cuts to peak-hour power consumption and windfall levies on energy companies in an urgent effort to bring down sky-high energy prices, according to AFP.

The decision, announced by the Czech Republic in its role holding the EU presidency, aims to mitigate energy costs sent soaring by Russia’s war in Ukraine and as the northern hemisphere winter looms.

European households and businesses are already staggering under surging energy bills, fueling record inflation that in the eurozone has hit 10 percent.

Extra drama has been injected with several unexplained leaks this week of Russia-Germany undersea gas pipelines, Nord Stream 1 and 2, that were widely seen as “sabotage.”

The EU ministers’ agreement came a day after Germany — the bloc’s export powerhouse that had long been dependent on Russian gas — announced a €200 billion  ($195 billion) energy aid package to shield its consumers.

Other EU countries have deployed smaller-scale national measures with the same aim, but several demanded European-level concertation, in part to clamp down on energy-buying competition between EU peers.

The two measures adopted were proposed by the European Commission.

The EU executive believes it can raise €140 billion from the levies on non-gas electricity producers and on energy majors that are raking in outsized profits from the global energy demand.

Its plan to cut power usage foresees a reduction of “at least five percent” during peak hours, according to a commission document seen by AFP.

Missing from the announced measures, however, was an idea espoused by 15 EU countries — among them France, Spain, Italy, Greece, Malta and Poland — for a price cap on imported gas.

The energy crisis, which had been brewing even before the war in Ukraine, took on greater magnitude when Russia severely curtailed natural gas supplies to Europe in retaliation for Western sanctions over its invasion.

Energy prices in the EU are calculated on the basis of the most expensive source, in this case gas, which has gone up around fivefold over the past year.

Several EU ministers went into the meeting wanting a gas price cap to be discussed.

“There is big disappointment that in the proposal that is on the table there is nothing about gas prices,” Polish Climate Minister Anna Moskwa said.

“This maximum price for gas would be supported by the majority of European countries” and “cannot be ignored,” she said.

But Germany resisted, fearing that a price cap would simply see liquefied natural gas shipments avoid Europe and sent to more lucrative markets, worsening the supply crunch for the EU.

The European Commission shares those concerns, although EU energy commissioner Kadri Simson said there needed to be a way to target just Russian gas — which arrives in the EU by pipeline, not in LNG form.

“We have to remove the incentives that are there for Russia to manipulate these volumes, and the answer is clear: We have to offer a price cap for all Russian gas.”

She and other participants, including Irish Climate Minister Eamon Ryan, said that, for a gas price cap to be effective other major buyers such as Japan and South Korea needed to cooperate with the EU.

German Economy Minister Robert Habeck said that, while Berlin was open to the idea of a price cap on Russian gas “as a sanction,” the broader application being called for was “treacherous.”

He insisted that “we need to bring down consumption” as a priority, and “we must not allow insufficient gas to reach Europe.”

While the measures agreed Friday were steps in the right direction, the Bruegel think tank in Brussels had warned in an analysis they were “not sufficient.”

“A more comprehensive plan needs to ensure that all countries bring forward every available supply-side flexibility, make real efforts to reduce gas and electricity demand, keep their energy markets open and pool demand to get a better deal from external gas suppliers,” it said.

Further EU measures were likely to be discussed at an informal summit in Prague next week, and another EU energy ministers’ meeting on Oct. 11 and 12.

“We need to go further on these issues and come to a rapid conclusion,” French Energy Minister Agnes Pannier-Runacher said.


Global stocks mixed after Eurozone inflation rises

Global stocks mixed after Eurozone inflation rises
Updated 54 min 40 sec ago

Global stocks mixed after Eurozone inflation rises

Global stocks mixed after Eurozone inflation rises

BEIJING: Global stocks were mixed Friday after inflation in 19 countries that use Europe’s euro currency spiked to a record and Chinese factory activity weakened.

London and Frankfurt opened higher, while Shanghai and Tokyo declined while Hong Kong advanced.

Wall Street futures rebounded after the benchmark S&P 500 index fell Thursday to its lowest level in almost two years. Oil prices edged higher.

Inflation in Germany, France and other euro zone countries accelerated to 10 percent in September from the previous month’s 9.1 percent, the statistics agency Eurostat reported. That was the highest since record keeping for the euro began in 1997.

Investors increasingly worry the global economy might tip into recession following aggressive interest rate hikes this year by the US Fed and central banks in Europe and Asia to cool inflation that is at multi-decade highs.

Markets slid this week after British Prime Minister Liz Truss announced plans for tax cuts that investors worry will push inflation higher. Meanwhile, global export demand is weakening and Russia’s attack on Ukraine has disrupted oil and gas markets.

“We’d be inclined to argue that we haven’t yet seen the bottom,” ING economists said in a report.

On Thursday, German Chancellor Olaf Scholz said the world’s fourth-biggest economy faces a “double whammy” from inflation and surging energy prices.

In early trading, the FTSE 100 in London rose 0.7 percent to 6,929.43 and Frankfurt’s DAX advanced 0.7 percent to 12,064.73. The CAC 40 in Paris added 0.6 percent to 5,708.42.

On Wall Street, the S&P 500 future was 0.6 percent higher. That for the Dow Jones Industrial Average was up 0.4 percent.

On Thursday, the S&P 500 fell 2.1 percent to its lowest level in almost two years after strong US jobs data reinforced expectations the Federal Reserve will stick to plans for more interest rate hikes.

The Dow slid 1.5 percent and the Nasdaq composite lost 2.8 percent.

In Asia, the Shanghai Composite Index fell 0.6 percent to 3,024.39 after surveys of manufacturers showed factory production, new export orders and manufacturing employment declined in September.

The Nikkei 225 in Tokyo fell 1.8 percent to 25,937.21 and the Hang Seng in Hong Kong gained 0.5 percent to 17,257.08. The Kospi in Seoul lost 0.7 percent to 2,155.49.

Sydney’s S&P ASX 200 sank 1.2 percent to 6,474.20 while India’s Sensex advanced 1.8 percent to 57,421.45. New Zealand and Southeast Asian markets declined.

Stock markets and the value of the British pound rebounded Wednesday after the Bank of England said it would buy government bonds to support their price. But markets resumed their slide Thursday after Truss shrugged off criticism and defended her tax-cut plan despite a plea from the International Monetary Fund to reverse course.

The S&P 500 is on track to end September with an 8 percent loss for the month. It is down more than 20 percent for the year as investors wait for a break in inflation that has prompted the Fed to raise interest rates five times.

The yield on a two-year US Treasury, or the difference between its market price and the payout at maturity, widened to 4.2 percent on Thursday from Wednesday’s 4.14 percent.

Stronger-than-expected US employment data Thursday reinforced expectations the Fed will feel comfortable sticking to plans to raise interest rates further and keep them elevated through next year.

In China, surveys of manufacturers by business news magazine Caixin and an official industry group found production and new export orders declined. That was in line with expectations that a Chinese manufacturing boom would fade due to weak global demand.

“The downturn in external demand looks set to deepen,” Zichun Huang of Capital Economics said in a report.

In energy markets, benchmark US crude lost 49 cents to $81.72 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 92 cents Thursday to $81.23. Brent crude, used to price international oils, shed 58 cents to $87.76 per barrel in London. It lost 83 cents the previous session to $88.49.

The dollar edged down to 144.40 yen from Thursday’s 144.43 yen. The euro rose to 98.16 cents from 97.90 cents.


European shares rise; set to end painful Sept quarter lower

European shares rise; set to end painful Sept quarter lower
Updated 30 September 2022

European shares rise; set to end painful Sept quarter lower

European shares rise; set to end painful Sept quarter lower

BENGALURU: European stock indexes climbed on Friday, the last trading session of a painful quarter, hit by worries about the impact of aggressive policy tightening measures by central banks on economic growth and corporate earnings, according to Reuters.

The region-wide STOXX 600 index was up 1 percent by 0810 GMT, led by bargain hunting in beaten-down shares of retailers, oil and gas companies, and banks, rising between 1.8 percent and 2 percent.

The index was down 5 percent for the July-September period and set to notch its third straight quarterly decline in what will be its longest such losing streak since 2011. For the month, it shed 6.8 percent.

The market has been under pressure since the Russia-Ukraine war earlier this year jolted the region and sent gas prices soaring, leading to rampant inflation, which sparked concerns about a recession due to central banks delivering hefty rate hikes.

“We have got a huge reevaluation of asset prices and the markets down at year lows, that is just pushing investors to take a look at some of these new levels on offer,” said John Woolfitt, director-trading, Atlantic Capital Markets.

“There’s a tug of war going on in the market at the moment. One side is bargain hunters looking at prices not seen for a while and the other side is just rebalancing portfolios to ensure that in this new sort of era, certain assets aren’t still being held.”

Data earlier in the day showed the Netherlands’ inflation jumped to 17 percent in September, its highest in decades on skyrocketing energy prices.

All eyes are on September eurozone inflation data due at 0900 GMT that will likely strengthen the case for another 75 basis point rate increase by the European Central Bank in October.

German inflation accelerated to 10.9 percent this month, exceeding market expectations.

EU countries on Friday will likely approve emergency levies on energy firms’ windfall profits and launch talks on their next move to tackle Europe’s energy crunch.

Russian President Vladimir Putin is set to host a Kremlin ceremony on Friday annexing four regions of Ukraine, after what Kyiv and Western countries said were sham votes staged at gunpoint.

Italy’s Webuild rose 1.9 percent after the builder said it expected its commercial results for the year to “significantly exceed” guidance.

Shares of German sportswear makers Puma and Adidas slid 5.1 percent and 4.1 percent, respectively, after US rival Nike Inc. cautioned that gross margins would remain under pressure through the year due to ramped up discounts and a rapidly strengthening dollar.


India hikes rates to tame stubbornly high inflation, analysts see more tightening

India hikes rates to tame stubbornly high inflation, analysts see more tightening
Updated 30 September 2022

India hikes rates to tame stubbornly high inflation, analysts see more tightening

India hikes rates to tame stubbornly high inflation, analysts see more tightening

MUMBAI: The Reserve Bank of India raised its benchmark repo rate by 50 basis points on Friday, the fourth straight increase, as policymakers extended their battle to tame stubbornly high inflation and analysts said further tightening is on the cards, according to Reuters.

The monetary policy committee, comprising of three members from the RBI and three external members, raised the key lending rate or the repo rate to 5.90 percent with five out of the six voting in favor of the hike.

The RBI has now raised rates by a total 190 basis points since its first unscheduled mid-meeting hike in May but inflation continues to remain stubbornly high — a phenomenon that is affecting much of the global economy.

“The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments,” Governor Shaktikanta Das said in his address accompanying the MPC’s decision.

“In this backdrop, MPC was of the view that persistence of high inflation, necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second round effects,” he said.

The MPC also was of the view the current policy rate, adjusted for inflation, was still below 2019 levels.

Most economists expect further tightening, and several predicted the terminal rate at 6.5 percent, suggesting another 60 bps of rate hikes.

That is well above this month’s median Reuters poll forecast at 6.00 percent in each quarter through end-2023.

“The market was positioned for peak policy rate near 6 percent, today’s 50 bps hike will raise expectations that the peak policy rate is higher than earlier believed. We see peak policy rate at 6.5 percent now,” said Prithviraj Srinivas, chief economist at Axis Capital.

Fed angst

The US Federal Reserve’s relentless and aggressive rate hikes over recent months to curb inflation have battered the rupee, and most other emerging and developed market currencies.

“Clearly, the fast-evolving world order and consistent repricing of Fed’s out-sized hikes are strong-arming the emerging markets,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

Policymakers around the world are grappling with a sweeping shift away from their respective currencies and into the safe-haven dollar, raising worries of capital outflows and further damage to their economies.

Economists say the RBI too would need to focus on ensuring the interest rate differential is not too low.

The standing deposit facility rate and the marginal standing facility rate were also increased by the same quantum to 5.65 percent and 6.15 percent, respectively

The MPC lowered its GDP growth projection for financial year 2023 to 7 percent from 7.2 percent earlier, while its retail inflation forecast was held steady at 6.7 percent.

India’s annual retail inflation rate accelerated to 7 percent in August, driven by a surge in food prices, and has stayed above the RBI’s mandated 2-6 percent target band for eight consecutive months.

The benchmark 10-year bond yield eased marginally after the RBI’s decision to 7.3535 percent at 07335 GMT while the partially convertible rupee weakened briefly before bouncing to 81.58 per dollar versus 81.86 on Thursday.

The broader NSE Nifty 50 index recovered sharply after a brief fall to trade up 1.65 percent.
 

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Europe’s biggest nuclear reactor reaches full power

Europe’s biggest nuclear reactor reaches full power
Updated 30 September 2022

Europe’s biggest nuclear reactor reaches full power

Europe’s biggest nuclear reactor reaches full power

HELSINKI: Finland’s long-delayed Olkiluoto 3 nuclear reactor has reached full power to become the most powerful electricity production facility in Europe, operator TVO said Friday, a boost amid a continent-wide energy crunch, according to AFP.

With a power level of 1,600 megawatts, the plant located on the Nordic country’s southwestern coast is also now the third most powerful electricity production facility globally, the company said.

OL3’s production is being closely followed in Finland, where the hope is that the plant could ease the coming winter’s challenges as European energy prices have soared following Russia’s invasion of Ukraine.

“The plant unit is now the most powerful electricity production facility in Europe,” TVO said in a statement, adding that regular operation is expected to start in December 2022.

Around 40 percent of Finland’s electricity production now comes from Olkiluoto, as the OL1 and OL2 reactors combined produce approximately 21 percent and the new OL3 alone around 19 percent.

The reactor, built by the French-led Areva-Siemens consortium, went online in March — 12 years behind schedule — after suffering a long string of setbacks.

The plant’s regular production was expected to start this summer but was postponed to December, after “foreign material” was observed in the turbine’s steam reheater.

Operator TVO said that the ten remaining sets of tests will impact the power levels in the coming months.

“In some of the upcoming tests, the plant unit’s production is either intentionally interrupted or the power level is lowered,” the company said.

The European Pressurised Reactor model was designed to relaunch nuclear power in Europe after the 1986 Chernobyl catastrophe, and was touted as offering higher power outputs and better safety.