GCC banks to prove resilient in 2024 amid geo-economic challenges: S&P Global

Robust capitalization and profitability to uphold GCC banks, despite emerging risks
GCC banks to prove resilient in 2024 amid geo-economic challenges: S&P Global
2024 will see a headline real GDP growth acceleration across all GCC countries, except Bahrain

S&P Global‘s ‘GCC Banking Sector Outlook 2024’ reveals a challenging yet optimistic perspective. Despite geopolitical uncertainties and potential economic headwinds, S&P expects GCC banks to maintain their well-capitalized, profitable, and liquid status.

S&P Global anticipates overall stability in key metrics for GCC banks in 2024. However, it sees a slight softening from the strong levels the sector recorded in 2023. Credit growth and profitability are expected to remain robust, with the UAE and Saudi banking systems leading the region. However, potential risks, including geopolitical tensions and real estate exposure, remain.

GCC macroeconomic environment

The macroeconomic environment in 2024 will see a headline real GDP growth acceleration across all GCC countries, except Bahrain. Moreover, S&P expects non-oil growth to remain dynamic in Saudi Arabia and the UAE. Meanwhile, high interest rates are anticipated to persist with a 1 percent decrease by year-end mirroring the U.S. Federal Reserve’s trajectory. Inflation is also expected to remain close to target and contained. On the other hand, oil prices, a pivotal factor for fiscal expenditure, are expected to remain stable. However, geopolitical tensions and China’s growth pose potential risks.

Banking performance projections

The economic environment will support the GCC banks’ credit demand, resulting in continued strong credit growth. However, caution in lending may slightly slow overall credit growth by year-end. In addition, asset quality which is supported by precautionary provisioning, is expected to remain relatively strong. Capitalization levels across GCC countries are forecasted to strengthen slightly, except in Saudi Arabia, where S&P expects the fastest growth.

GCC banks are mostly funded through strong local deposit franchises for countries like UAE, Kuwait, and Oman. However, in Oman, one-third of customer deposits come from the government and its related entities. Moreover, liquidity strains could emerge in externally leveraged systems like Qatar and could rise where domestic funding is growing slower than credit.

GCC banks

Key risk factors

The report highlights three main risk factors that could impact GCC banks. This includes heightened geopolitical risk, real estate exposures, and high-risk jurisdictions, particularly in Turkiye and Egypt. Geopolitical risks may negatively affect sentiment, investment, and capital flows. However, S&P believes that no situation will put the region’s financial stability to the test. Hence, the GCC’s banking sector has strong net external positions and can withstand or offset significant outflows of foreign funding.

When it comes to the real estate sector, mortgage penetration levels in the region are low, but a correction in residential real estate prices, expected in Dubai, and high vacancies in the commercial real estate sector could forecast a slowdown in growth and weakening of asset quality.

High-risk countries, especially Turkey and Egypt, seem to be experiencing a reduction in potential threats. S&P’s analysis of potential losses indicates that the risks in these high-risk jurisdictions are relatively contained at the overall system level. Despite this positive trend, individual GCC banks have significantly expanded their presence in both Turkey and Egypt. The total exposures from these expansions amount to approximately $160 billion. The report outlines potential loss scenarios but emphasizes that the risks are highest in exposed Bahraini banks and lowest in Saudi Arabia.

Solid credit ratings and support

GCC banks maintain strong credit ratings, averaging close to ‘A-‘. This is due to robust capitalization and strong government support. However, risk exposure and loss experience are concerns for some, but the majority of banks display a stable outlook. Notably, the Saudi Investment Bank is the only bank that does not have a stable outlook but stands out with a positive outlook for idiosyncratic reasons.

Moreover, credit growth in the GCC is intricately linked to public expenditure cycles which are influenced by hydrocarbon revenue. Despite potential headwinds like higher rates and increased risk aversion, healthy lending is expected in 2024. Besides, Oman is anticipated to experience strong credit growth, while Qatar’s growth may be subdued due to slower government capital expenditure.

Profitability and capitalization

GCC banks continue to benefit from non-interest-bearing deposits, and profitability expectations vary between countries. Saudi Arabia and the UAE boast the strongest Return on Assets (RoA) forecasts. Meanwith, S&P expects overall profitability to remain strong throughout the region. Capitalization levels are also projected to strengthen further in 2024. Moreover, common equity continues to dominate the quality of capital.

Read: 10 UAE banks record $12.6 billion in net profits in 2023

Funding profile and liquidity

The GCC banks are predominantly funded by strong and stable domestic deposits, with robust net external positions, except in Qatar. As high rates of domestic growth outpace deposit funding, particularly in Saudi Arabia’s increasing loan-to-deposit ratio, expectations are for external funding to increase. While external funding is generally viewed as less stable, S&P Global believes GCC banks are well protected from external outflows.

Moreover, liquidity indicators point to diverging levels, with Kuwait and the UAE enjoying excess liquidity from public-sector oil-generated deposits. Though short-term borrowing is limited in overall liabilities, some Saudi Arabian banks have seen a decline in liquid assets as a share of total assets, a trend expected to continue amid brisk growth. Nonetheless, the expectation is that monetary authorities would provide liquidity during tighter periods, particularly for banks funding strategic projects related to economic diversification or sustainability.

Sustainability agendas

The energy transition’s impact on oil and gas prices, as well as investor and customer appetites for carbon-intensive sectors and markets, will influence GCC banks’ long-term creditworthiness. Moreover, competitive advantages, such as low extraction costs and flexible production capacity, position GCC economies well in the global energy transition.

GCC banks are actively working to advance their sustainability agendas by increasing sustainable finance offerings to customers and contributing to government efforts to decarbonize economies. However, bold regulatory action, such as the introduction of climate stress testing or other measures to encourage banks to accelerate their transition, is yet to be seen.

While GCC banks exhibit strong fundamentals, the report notes that sustainability agendas are still in progress. Over the past three years, banks have published their sustainability strategies, with varying degrees of ambition. Some banks have tapped international capital markets using sustainable bonds, contributing to global efforts to decarbonize economies.

In summary, S&P Global’s outlook for the GCC banking sector in 2024 paints a picture of resilience amidst challenges. Robust fundamentals, coupled with cautious optimism, position the region’s banks to navigate the complex economic landscape and sustain their status as pillars of stability.

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