GCC Banks Well Positioned To Continue Strong

Doha, Qatar: The solid first half (H1) performance indicators suggest Gulf Cooperation Council (GCC) banks will finish this year strong.

GCC banks’ good performance should continue throughout 2024, absent any unexpected shock, thanks to increasing lending volumes, higher fee income, stable margins, and strong cost efficiency. For 2025, expected rate cuts would trim margins but could be supportive of asset quality, according to Standard & Poor’s (S&P) Global Ratings report.

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 risks that could shift investor sentiment.

“We expect sustained strong performance over the remainder of the year will help GCC banks navigate potential turbulence. Alongside solid results, conservative dividend payouts will likely help maintain, or further strengthen, banks’ capitalization,” S&P further said.

At June 30, 2024, the average Tier 1 ratio for banks in our sample stood at 17.1 percent versus 17.3 percent at end-2023. Banks’ strong provisions in Kuwait and the state’s strong footprint in the Qatari economy will likely support banking sector resilience. 

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 percent 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 percent for these banks. This clearly 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. 

In addition, “we think banks’ measures to control costs might means that the overall impact may be lower than the suggested 12 percent decline,” it added.

The non-oil sectors in Saudi Arabia and the UAE spurred 10.4 percent annualised lending growth for the top 45 GCC banks in the first half of 2024, up from 6.7 percent in 2023. For the same period, higher-for-longer interest rates kept margins stable at 2.7 percent despite the migration of deposits from noninterest bearing (NIBs) instruments to remunerated ones. 

NIBs reached 45 percent at end-2023, down from 48 percent 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 percent, from 1.65 percent at end-2023, it noted.