Banks in the GCC region are expected to boost good performance throughout 2024, absent any unexpected shock, according to the latest S&P Global report.
Increasing lending volumes, higher fee income, stable margins and strong cost efficiency are some of the main drivers of this growth. Moreover, although the expected interest rate cuts trim the banks’ margins, these are also expected to be supportive of asset quality.
More broadly, GCC banks remain exposed to potentially slower economic growth because of oil market dynamics (production and prices), the potential unwinding of imbalances in real estate and geopolitical risks.
The non-oil economy in H1 2024
Looking at the first half of the year, the non-oil sectors in Saudi Arabia and the UAE spurred 10.4% annualised lending growth for the top 45 GCC banks in the first half of 2024, up from 6.7% in 2023.Â
During this period, the continuation of higher interest rates kept margins stable at 2.7% despite the migration of deposits from noninterest bearing (NIBs) instruments to remunerated ones. NIBs reached 45% at end-2023, down from 48% at end-2022, and have since continued dropping.
These developments enabled the banks to maintain strong profitability in the first half, with return on assets strengthening to 1.74%, from 1.65% at end-2023, S&P said.
H2 2024 predictions
Solid results, as conservative dividend payouts are expected to help maintain, or further strengthen, banks’ capitalisation during the rest of 2024.
“We expect sustained strong performance over the remainder of the year will help GCC banks navigate potential turbulence,” S&P analysts said. On June 30, 2024, the average Tier 1 ratio for banks in the researchers’ sample stood at 17.1% versus 17.3% at end-2023.
Interest rate cuts could cut 12% from the bottom lines of GCC banks
The assumption that the US Federal Reserve will soon cut interest rates is said to “shave 12% from the bottom line” of the GCC banks in S&P Global’s sample. Based on 2023 disclosures; each 100-bps rate drop reduces net income by 8% for these banks. However, analysts pointed out that the measures introduced to control costs might help lower the overall impact of rate cuts.
Barring a sharp escalation of conflict in the regions, the researchers believed GCC sovereigns and banks are “relatively well positioned” to navigate the adverse impacts of the existing geopolitical risk.
Although external debt has risen for Bahrain and Saudi Arabia, the risks are said to be “still in check” and the UAE and Kuwait remain in a net external asset position. Qatar’s external debt has stabilised and any unexpected outflows are expected to prompt government support.
