S&P Global Ratings has indicated that the robust performance metrics of Gulf Cooperation Council (GCC) banks during the first half of the year suggest a strong finish for them in 2024.
The positive trajectory of GCC banks is expected to persist throughout 2024, barring unforeseen shocks. This outlook is supported by rising lending volumes, increased fee income, stable margins, and effective cost management.
Looking ahead to 2025, anticipated interest rate cuts may compress margins but could bolster asset quality, according to S&P Global Ratings in their recent report titled “Your Three Minutes In Banking: GCC Banks Are Well Positioned To Continue Their Strong Run.”
On a broader scale, GCC banks face exposure to potential economic slowdowns driven by oil market fluctuations (production levels and prices), possible corrections in the real estate sector and other cyclical industries, as well as geopolitical risks that could alter investor confidence.
Current developments
The non-oil sectors in Saudi Arabia and the UAE have fueled a 10.4 percent annualized growth in lending for the top 45 GCC banks in the first half of 2024, a rise from 6.7 percent in 2023. During this period, persistently high interest rates maintained margins at a steady 2.7 percent, despite a shift of deposits from non-interest-bearing (NIB) instruments to interest-earning accounts.
NIBs accounted for 45 percent of total deposits at the end of 2023, down from 48 percent at the end of 2022, and this trend has continued. The consistent growth in non-oil sectors has bolstered asset quality metrics, with the cost of risk remaining at 60-70 basis points (bps). As a result, banks maintained strong profitability in the first half, with return on assets rising to 1.74 percent, up from 1.65 percent at the end of 2023.
Significance of these trends
S&P anticipates that the ongoing strong performance will aid GCC banks in navigating potential challenges ahead. In light of solid financial results, conservative dividend distributions are likely to preserve or enhance banks’ capitalization. As of June 30, 2024, the average Tier 1 ratio among banks in S&P’s sample was 17.1 percent, slightly down from 17.3 percent at the end of 2023. However, subdued real estate activity in Qatar and Kuwait — driven by oversupply and weak demand, respectively — could pose risks for these banking sectors. Nonetheless, robust provisioning in Kuwait and the state’s substantial presence in the Qatari economy are expected to bolster the resilience of the banking sector.
Future outlook
GCC banks are projected to remain resilient. S&P forecasts that the Federal Reserve will lower rates by 150 bps between September 2024 and the end of 2025. This reduction could decrease the net income of the GCC banks in S&P’s sample by 12 percent, based on data from 2023; each 100 bps rate cut is estimated to reduce net income by 8 percent. This calculation assumes static balance sheets, indicating manageable risks.
This scenario may also provide relief for highly leveraged corporations and retail customers, thereby supporting asset quality. Additionally, S&P believes that banks’ cost-control strategies could mitigate the overall impact, making the projected 12 percent decline less severe.
A prolonged, full-scale regional conflict is not anticipated in S&P’s baseline scenario. GCC sovereigns and banks are relatively well-equipped to handle the adverse effects of geopolitical risks, barring extreme situations such as the closure of critical export routes or domestic security threats. A significant increase in uncertainty could lead to harmful capital outflows or prompt sovereigns to liquidate external assets for support, as seen in previous geopolitical crises. While external debt has increased for Bahrain and Saudi Arabia, risks remain manageable.
Saudi Arabia’s net external debt position is modest, bolstered by significant regional deposits in Bahraini banks, which are expected to remain stable in most scenarios. The UAE and Kuwait continue to maintain a net external asset position, while Qatar’s external debt has stabilized, with expectations that any unforeseen outflows will trigger government intervention.
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