Increasing lending volumes, higher fee income, stable margins, and strong cost efficiency will continue to prop up GCC banks’ good performance throughout 2024, absent any unexpected shock, according to banking analysts.
For 2025, expected rate cuts would trim margins of the regional banks but could be supportive of asset quality, analysts at S&P Global Ratings said.
“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 other cyclical sectors, and geopolitical,” said Mohamed Damak, primary analyst at S&P Global Ratings.
A sharp increase in uncertainty could trigger detrimental capital outflows or prompt sovereigns to liquidate external assets and provide support, as was seen in previous episodes of heightened geopolitical risk, they said.
GCC banks have consistently maintained a higher return on equity and stronger market multiples than their global counterparts. Their advantage in efficient capital management is evident, with a 3-4 percentage point lead in ROE over the past two years, McKinsey analysts said.
The non-oil sectors in Saudi Arabia and the UAE spurred 10.4 per cent annualized lending growth for the top 45 GCC banks in the first half of 2024, up from 6.7 per cent in 2023. For the same period, higher-for-longer interest rates kept margins stable at 2.7 per cent despite the migration of deposits from noninterest-bearing (NIBs) instruments to remunerated ones, S&P Global said in its report.
NIBs reached 45 per cent at end-2023, down from 48 per cent at end-2022, and have since continued dropping. Steady non-oil growth supported asset quality metrics, with cost of risk at 60-70 basis points (bps). These developments enabled the banks to maintain strong profitability in the first half, with return on assets strengthening to 1.74 per cent, from 1.65 per cent at end-2023, said the S&P report.
“GCC banks should remain resilient. We expect the Federal Reserve to cut rates by 150 bps between September 2024 and end-2025. This will likely shave 12 per cent from the bottom line of the GCC banks in our sample, based on 2023 disclosures; each 100-bps rate drop reduces net income by 8.0 per cent for these banks. This assumes static balance sheets but points to manageable risks. This is also likely to create some breathing space for highly leveraged corporates and retail clients, thereby supporting asset quality,” S&P analysts said.
“In addition, we think banks’ measures to control costs might means that the overall impact may be lower than the suggested 12 per cent decline. A protracted, full-scale regional conflict remains outside our base case. GCC sovereigns and banks are relatively well positioned to navigate the adverse impacts of geopolitical risk absent extreme downside scenarios such as the closure of key export routes or threats to domestic security,” they said.
According to McKinsey, elevated interest rates, while posing challenges for global banks, have proven advantageous for GCC institutions. They have capitalized on record-high regional and international banking profits, generating substantial shareholder value. GCC banks also exhibit superior net interest margins and revenue-to-assets ratios compared to the global average, they noted.
McKinsey warned that the GCC banking sector’s “remarkable performance” in the past year, largely thanks to high interest rates, “could foster complacency among bank managers and sap their will to implement ambitious transformation agendas.”