Gulf Cooperation Council (GCC) banks have reported solid performance in the first half of 2025, achieving a 13.2% return on equity (ROE), amid an environment of narrowing margins. This performance is underpinned by stronger asset quality and capital reserves, yet banks are navigating tighter liquidity as interest rate cuts challenge their margins.
According to an EY report, the underlying strength in asset quality and cost efficiency has been a key driver in maintaining robust profitability for GCC banks. Despite the prevailing economic headwinds, including interest rate fluctuations and liquidity pressures, the sector has benefitted from a more diverse income base and operational improvements. The report also forecasts the GCC economy to grow by 3% in 2025, with a further acceleration to 4.1% projected for 2026, largely driven by investments in infrastructure and diversification strategies.
The region’s banking sector is set to benefit from a forecasted 1.7% rise in oil GDP in 2025, climbing to 5.4% the following year. Non-oil economic activities are expected to continue as primary growth drivers, enhancing the banking industry’s role in the broader economic landscape. Mayur Pau of EY MENA highlighted that the banks’ strengthened balance sheets position them well for future opportunities, supported by non-interest income and improved cost-to-income ratios, which have dropped to 32%.
Non-performing loans have decreased from 2.8% to 2.4%, reflecting an enhancement in asset quality, while coverage ratios remain healthy above 140%. The average Tier 1 capital ratio and capital adequacy ratio stand at 17.5% and 18.9%, respectively. However, the tailwind from robust fundamentals is somewhat tempered by a tightening of net interest margins, which have shrunk from 2.8% to 2.6% year over year, with more compression anticipated due to recent rate cuts.
Despite these challenges, credit growth remains on a positive trajectory, especially in Saudi Arabia and the UAE, where economic and lending activities are propelled by regional transformation agendas. Moreover, banks are actively exploring ways to alleviate the pressure on margins through diversification of revenue streams and improvement of operational efficiency.
