Banks in the GCC region will see an increase in M&A activities, which will enable greater synergies and the creation of banking entities with a greater scope of business, supporting the diversification of the region’s economies away from oil.
Moody’s says that ongoing and long-standing alliances between Gulf banks will enable large-scale banking services to be offered in the region in the next decade.
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Francesca Paolina, an analyst at Moody’s, believes the merger will create banks with “pricing power,” boosting their ability to raise deposits and increasing net interest income on their balance sheets. “Mergers and acquisitions will also help offset rising operating expenses and boost already good cost efficiency levels.”
Large Gulf banks are financing transformation projects in the region and can increase their dominance through mergers and acquisitions, which will also help them compete outside their home markets, Paolina said.
Mergers and acquisitions will boost Islamic banking penetration in the sector, as “Islamic finance market share is expanding rapidly across the region in response to high customer demand and supportive regulations,” according to Moody’s.
Moody’s expects the return on equity for GCC banks to be between 12 percent and 14 percent over the 12-18 months due to mergers and acquisitions.
Another incentive for major Gulf banks to strike M&A deals is to expand their presence abroad and start competing internationally.
Sovereign Sukuk
Moody’s said the improved financial position of energy exporters such as Saudi Arabia will help stabilize long-term sovereign sukuk issuance at around $80 billion in 2023 and $80 to $85 billion in 2024.
Hydrocarbon price support, albeit low, will continue to boost the financial balances of sovereign energy issuers, with the majority of GCC countries recording budget surpluses in 2023-2024.
Alexander Bergessie, Vice President and Chief Credit Officer at Moody’s, said: “As a result, the GCC issuance in 2023 will be driven primarily by governments’ decisions to refinance or repay outstanding sukuk using excess funds.”
“We expect the decline in total issuances from the GCC to be offset by greater volume elsewhere, particularly in Indonesia, where domestic sukuk issuance fell significantly last year.”
Six years after Saudi Arabia received the highest single share of long-term sovereign sukuk issuances, the credit rating agency expects Malaysia and Indonesia to take the largest share, reflecting larger sukuk refinancing needs, if the fiscal deficit improves marginally.
In Saudi Arabia, sovereign sukuk issuance volumes fell 4 percent to $29.8 billion in 2022, with the vast majority – with the exception of $2.5 billion of dollar-denominated foreign sukuk – being issued in the domestic market under the issuance schedule.
“Last year’s release was much higher than we expected at the beginning of 2022. This is because the government has opted for pre-financing around 2023 maturities in 2022 and conducting a liability management process by issuing sukuk, both of which have added approximately $16 billion to Saudi Arabia’s total sovereign sukuk issuances.”
According to Moody’s, Saudi Arabia is expected to run a budget surplus of 0.8 percent of GDP in 2023, a relatively slight decline from a surplus of 2.6 percent of GDP in 2022, driven by continued strong oil and gas revenues.
Moody’s affirmed Saudi Arabia’s credit rating of A1 with a stable outlook, mainly driven by the effectiveness of the government’s fiscal policy, adding that non-oil private sector activity in the Kingdom will remain strong.
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