GCC banks are facing an era of moderated profitability due to anticipated interest rate cuts by the US Federal Reserve, projected to lower rates by 225 basis points through 2025. With GCC central banks likely to mirror these cuts to maintain currency stability, analysts expect a direct impact on profit margins. While these cuts may improve funding costs for some GCC banks, overall profit margins will decline modestly, with Bahrain, Kuwait and the UAE seeing a larger effect, according to the latest report from S&P Global.
Resilience amid economic shifts
Despite these challenges, GCC banks remain well-capitalised and resilient, benefiting from strong asset quality, low nonperforming loans (NPLs), and prudent provisioning practices. Since the Covid-19 crisis, NPL ratios in the GCC have stabilised between 3% and 4%, bolstered by strong post-pandemic economic performance and regulatory measures. Additionally, as banks prepared for potential shocks, they increased provisions, reinforcing balance sheets to cushion against economic fluctuations.
Geopolitical risks and economic outlook
The report underscores the vulnerability of GCC banks to geopolitical risks. While direct effects of geopolitical conflicts have been contained, potential escalations pose risks through energy prices, trade disruptions and capital flows. Four stress-test scenarios outlined by S&P range from modest impacts on credit metrics to severe stress involving prolonged regional conflict, which could significantly strain credit quality.
However, a positive economic outlook in the GCC may buffer banks from more severe impacts. The region is set to benefit from steady oil prices, expected to average $75 per barrel from 2024 through 2027, and economic diversification projects, particularly in Saudi Arabia and the UAE, likely to drive lending growth between 8% and 9%.
Capitalisation and funding stability
GCC banks’ robust capitalisation is further supported by a conservative dividend payout ratio below 50%, which aids in maintaining high Tier 1 capital ratios. In funding, the report highlights that core domestic deposits continue to be a primary source, providing stability even during periods of regional uncertainty. This deposit base, supported by substantial public sector contributions, underpins the banks’ funding profiles, though some systems, like those in Saudi Arabia and Oman, may increasingly look to external funding to meet growing credit demands.
Stress-testing and loss potential
Stress tests conducted by S&P reveal that GCC banks could manage moderate external deposit outflows and have sufficient liquidity to handle local private sector withdrawals. While Qatar shows a minor funding deficit due to a weaker liquidity position, the broader GCC banking system holds an estimated $264 billion in liquid assets to cover potential outflows. Under severe stress scenarios, where geopolitical tensions intensify, asset quality deterioration could lead to cumulative losses of up to $24.6 billion for the top 45 banks in the region, though most banks are positioned to absorb these losses without compromising stability.
Outlook for GCC banks
The GCC banking sector’s outlook remains stable, with a positive bias, particularly in Saudi Arabia, where government support is considered “highly supportive.” The continued focus on capital buffers, conservative lending practices, and strategic growth plans positions GCC banks to navigate an evolving economic landscape, albeit with cautious optimism, as rate cuts and geopolitical risks loom.
