Gulf Cooperation Council (GCC) banks’ US dollar debt issuance completed its strongest quarter ever in the first quarter of 2024, with issuance already exceeding the full-year 2023 total, a report from Fitch Ratings showed.
First-quarter issuance has been driven by strong investor sentiment fuelled by high oil prices, and rapid credit growth in Saudi Arabia. “We expect these drivers to continue, and issuance will also be spurred by about $30 billion of maturities in 2024-2025 and lower US dollar interest rates,” Fitch analysts wrote in a report. The agency expects the US Federal reserve to cut rates by 75 basis points this year and 125 basis points next year .
Year-to-date issuance is $20.1 billion, already surpassing the 2023 total of $15.2 billion. Banks in Saudi Arabia (A+/Stable) and the UAE (AA-/Stable) account for 33 per cent and 26 per cent of the year-to-date figure, respectively. “This is the first time that Saudi Arabian banks have issued more US dollar debt than UAE banks. They have been increasingly active in international debt capital markets since 2020 to support their strong financing growth plans, diversify their funding bases, and more recently, to offset the high cost of liquidity domestically,” the report said.
According to Fitch data, GCC banks account for about 10 per cent of the medium-term US dollar debt issued by investment-grade banks in the first quarter of 2024. They have paid an average coupon rate of about 5.2 per cent for five-year senior unsecured issuance. They have also issued more short-term certificates of deposit (CDs) from large financial hubs, including New York, London, Hong Kong and Singapore. “This expands their investor base, widens their liquidity pools and deepens their trade and business relationships. CDs from large financial hubs are 33 per cent of GCC banks’ total year-to-date issuance.
GCC banks are also expanding their investor base through increasing issuance of sukuk. Sukuk accounts for 51 per cent of year-to-date issuance excluding CDs, reflecting strong investor demand and pricing dynamics.
GCC banks have about $16.9 billion of US dollar debt maturing in 2024, split fairly even between the UAE, Saudi Arabia, Qatar and Kuwait. “We believe many banks front-loaded their issuance in 2023 and the first quarter of 2024, ahead of maturities. However, we expect issuance to remain strong through the rest of 2024, with the annual total potentially exceeding the 2020 record,” Fitch analysts wrote.
The ratings agency expects Saudi banks’ US dollar issuance to continue gathering pace due to the strong credit growth outlook, especially in the corporate segment, and tight liquidity in the banking sector. “Coupon rates on Saudi banks’ five-year senior unsecured issuance in the first quarter of 2024 averaged 5.1 per cent. This is well below the three-month Saudi Interbank Offered Rate of 6.2 per cent, and we expect banks to continue to be attracted by pricing in the international capital markets as the cost of liquidity in the Saudi banking sector is likely to remain high this year despite strong deposit inflows from government-related entities,” the report said.
GCC banks have about $13.3 billion of US dollar debt maturing in 2025. Most of this is at UAE and Qatari banks. A large amount of this is likely to be refinanced as improving financing conditions should support lower borrowing costs. We believe total US dollar debt issuance could exceed $20 billion in 2025 on the back of better financing conditions.
GCC banks also have about $3.6 billion of US dollar additional Tier 1 instruments with first call dates in 2024-2025. “We expect all of the instruments to be called, which will also support issuance,” the analysts wrote.