Banks in the Gulf Cooperation Council region — Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman — are set for higher profits in 2023, Gulf Cooperation Council capital markets are expected to see continued strong activity, and Gulf investors may take further stakes in European financial services companies.

Profitability rebound

Banks in the Gulf Cooperation Council, or GCC, region are set to report near-pre-pandemic levels of profits for full year 2022, driven by an economic recovery and central banks' moves to tighten monetary policy, according to analysts at S&P Global Ratings. The benefits are expected to continue this year.

On Dec. 14, 2022, the U.S. Federal Reserve again raised interest rates by 50 basis points, and the central banks of Saudi Arabia, the United Arab Emirates, Bahrain and Qatar followed suit as their currencies are pegged to the U.S. dollar. Kuwait had raised rates a week earlier. The Fed signaled more hikes to come, projecting that its key rate could go above 5% in the next 12 months.

Net interest income — the difference between interest revenues earned from lending activities and interest paid to depositors — at the region's banks has soared in recent quarters as banks are able to pass rate increases on to customers. In the third quarter of 2022, the 20 largest GCC banks recorded net interest income of $14.66 billion, up from $13.61 billion in the previous quarter and $12.25 billion in the first quarter of 2022, according to S&P Global Market Intelligence data.

Qatar National Bank QPSC booked the highest third-quarter 2022 net interest income of approximately $2.11 billion. Saudi National Bank booked $1.74 billion and Dubai-based Emirates NBD Bank PJSC booked $1.67 billion.

Lending is expected to grow in Saudi Arabia, underpinned by projects related to the government's Vision 2030 framework, according to Ratings. Mortgages will also contribute to growth, albeit at a slower pace than in recent years. Higher rates will also affect new mortgage origination, the agency added.

Overall, GCC banks are entering 2023 "on solid footing" despite higher uncertainty. The main risks are seen coming from a slowdown in economic activity, exposure to riskier countries such as Egypt and Turkey, and a potential liquidity crunch, Ratings said. Local and global liquidity may become scarcer in some geographies.

IPO boom

The GCC region is set to see more capital markets activity in 2023 as more companies seek public listings, having been a bright spot amid a slowdown elsewhere this year.

"[The] GCC IPO markets have continued to thrive on the back of the large government listings that are being undertaken in the UAE and Saudi Arabia," Anish Ailawadi, global head of investment banking at Acuity Knowledge Partners, told S&P Global Market Intelligence. The oversubscription levels for the retail parts of IPOs in the region were "glaring evidence of the investment appetite of investors," Ailawadi said.

In a bid to take more share of the IPO boom, major banking groups have bolstered their teams in the region. U.S.-based Goldman Sachs Group Inc. plans to hire more wealth managers and investment bankers in the UAE and Saudi Arabia, and so does Citigroup Inc. Fellow Wall Street giant JPMorgan Chase & Co. is following suit. U.K.-based Barclays PLC is also reported to be seeking a Saudi Arabian license so it can manage IPOs.

In the first 11 months of 2022, the aggregate value of IPOs in the region hit $21.4 billion, its highest level since 2019 when Saudi Arabian Oil Co. floated. In terms of transaction volume, 2022 emerged as the best year since 2008, with as many as 46 IPOs taking place in the region, Market Intelligence data shows.

The biggest transaction by value so far has been Dubai Electricity and Water Authority PJSC's IPO in April 2022, which raised more than $6 billion. Petrochemical company Borouge PLC also launched an IPO, which raised $2 billion. Americana Restaurants International PLC, the regional operator of the KFC food chain, raised more than $1.80 billion when it floated in November 2022.

Goldman Sachs, First Abu Dhabi Bank PJSC and Egypt-based EFG-Hermes Holding SAE were underwriters in the three large IPOs, according to Market Intelligence data.

The year ahead "looks equally sharp," Acuity's Ailawadi said. "Government support and economic stability [are] expected to boost investors' confidence in the region, which is expected to accelerate activity in the equity capital markets."

The retail, energy, real estate, media and utilities sectors are due to see some big listings, said Ailawadi. MBC Group, the Middle East's biggest broadcaster, has previously been reported to be exploring an IPO. Abu Dhabi-based supermarket chain LuLu Group International LLC and Omani energy firm OQ SAOC were also reported to have tapped banks for potential listings.

Gulf investment in European financial services

Investors based in the GCC, bolstered by bumper hydrocarbon receipts, increased their shareholdings in European banks in 2022 and could buy further financial services stakes in 2023.

Most notably, Saudi National Bank took part in the high-stakes capital increase of Credit Suisse Group AG. The transaction gave Saudi National Bank a 9.9% stake in the Swiss bank, which now counts GCC investors as holders of up to a quarter of its capital. Saudi Arabia's sovereign wealth fund, Public Investment Fund, is Saudi National Bank's largest shareholder.

The Qatar Investment Authority, the Qatari sovereign wealth fund, and Saudi Arabia's wealthy Olayan family were already shareholders of Credit Suisse. The Qatar Investment Authority holds a 3.36% stake, and Olayan Investments Company Establishment has 3.22%, according to Market Intelligence data.

Credit Suisse could also see more investments from Saudi Arabia, with Crown Prince Mohammed bin Salman said to be considering a $500 million backing for the bank's CS First Boston Ltd. investment banking spinoff, sources told The Wall Street Journal.

GCC investors have stakes in at least eight large European banks. The largest aggregate investment is at Barclays, where they own roughly $1.71 billion of share capital. Qatar invested in Barclays at the height of the global financial crisis and allowed the U.K. bank to avoid a state rescue.

Saudi Arabian fund Kingdom Holding Co., majority-owned by Saudi Prince Alwaleed bin Talal, invested a combined $497.8 million in U.K. asset manager M&G PLC and insurer Phoenix Group Holdings PLC in July 2022. It also bought a stake in Legal & General Group PLC for $145.5 million earlier in 2022.

Saudi's Public Investment Fund owns nearly 17% of Kingdom Holding.

Further Gulf investments into major European banks and other assets are possible, Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington, D.C., told Market Intelligence.

"Gulf sovereign wealth funds are packing lots of financial firepower at the moment, and they are willing to use it," Mogielnicki said.

* Access details on Dubai Electricity and Water Authority's IPO on CapIQPro. * Access Qatar National Bank's income statement on CapIQPro.