In 2024, banks in the GCC and MENA regions face a landscape of both opportunities and challenges. The previous year showcased positive trends, with increased interest rates benefiting banks, despite some migration of funds to remunerated products. Asset quality indicators remained resilient and liquidity stayed adequate, albeit with localised pressures.
“Controlled inflation, higher oil prices and rising interest rates have propped up banking performance over 2023, with UAE banks’ profitability improving considerably over their GCC counterparts,” explained Lutfi Zakhour, Partner, Strategy& Middle East, part of the PwC network. “UAE banks have dynamically benefitted from rising interest rates, especially in comparison to KSA and Qatari banks. Saudi banks are having to deal with tighter liquidity due to the shortfall between deposit and financing growth.”
However, experts are keenly monitoring unforeseen risks, particularly concerning geopolitics, oil prices and external funding availability.
“Sentiment in the region has remained robust in 2023 with investors somewhat insulated from the events that have impacted markets elsewhere, although we have not been entirely immune from the wider global increase in inflation,” said Rasha Badawi, CEO of Barclays Private Bank UAE. “In our view, in 2024 the diversification of the local economies, the foreign investments (especially in the UAE), and the recognition of the region as one of the most prominent financial hubs set it in good stead.”
In 2024, a pivotal focus for banks is the strategic adaptation and innovation to diversify revenue streams across geographies. This proactive strategy provides stability and opens up growth opportunities amid evolving economic conditions. Zeeshan Khwaja and Ather Marwat of Kearney Middle East & Africa’s insights, combined with the trends observed in the GCC banking market, underscore the need for such strategic adaptation and innovation in the face of evolving economic conditions.
However, Aurelien Vincent of Strategy& Middle East, part of the PwC network, outlines two main categories of challenges facing the financial services sector. First, fundamental shifts such as digital transformation, cybersecurity threats, fintech disruptions, geopolitical tensions, and ESG concerns require careful navigation. Second, conjunctural phenomena like interest rate shifts, liquidity constraints, and credit cycle risks will continue to disrupt the industry.
Mohamed Damak, managing director of S&P Global Ratings, highlights that liquidity challenges will vary across MENA countries, with each facing unique circumstances. “Qatar, for example, the story will continue to be around external debt reduction and to what extent banks can replace these funds by local sources without disrupting their bottom lines,” he explained. “The external debt story will also be relevant for Egyptian banks that have built an external debt position over the past couple of years and where a devaluation of the pound could have a negative impact on banks’ capitalisation.”
The same story applies to Tunisia, but more on the sovereign side. The evolution of local liquidity conditions will be an important consideration for the Saudi banking system. So far, the system has benefited from deposits from the government and its related entities; it remains to be seen if this will continue.
While asset quality concerns are more prevalent outside the GCC, there is a reassuring expectation of relative stability within the region. This is largely due to the reasonably performing economies in the GCC, which provide a solid foundation for the banking sector.
Looking ahead, Badawi spotlights macroeconomic and geopolitical risks, including uncertainty in the growth-inflation mix and upcoming major elections in the US and UK. Additionally, investors must not overlook internal risks and the growing threat of climate change, which could have a profound impact on the banking industry.
In the outlook for 2024, geopolitical tensions, higher interest rates, limited liquidity and increased regulations are anticipated. Banks are expected to intensify their digital transformations, focusing on open finance, data, digitisation, generative AI, digital identity and cybersecurity to address privacy issues and fraud risks. Moreover, there will likely be mounting pressure on banks to demonstrate efforts towards environmental, social, and governance (ESG) responsibilities.
