This report does not constitute a rating action.
Gulf Cooperation Council (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. 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.
What's Happening
The non-oil sectors in Saudi Arabia and the UAE spurred 10.4% annualized lending growth for the top 45 GCC banks in the first half of 2024, up from 6.7% in 2023. For the same period, higher-for-longer interest rates kept margins stable at 2.7% despite the migration of deposits from noninterest bearing (NIBs) instruments to remunerated ones. NIBs reached 45% at end-2023, down from 48% 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%, from 1.65% at end-2023.
Why It Matters
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. At June 30, 2024, the average Tier 1 ratio for banks in our sample stood at 17.1% versus 17.3% at end-2023. Yet, still-muted real estate performance in Qatar and Kuwait--notably due to oversupply and subdued demand, respectively--could present risks for those banking sectors. However, banks' strong provisions in Kuwait and the state's strong footprint in the Qatari economy will likely support banking sector resilience.
What Comes Next
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% 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% 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% 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. A sharp increase in uncertainty could trigger detrimental capital outflows or prompt sovereigns to liquidate external assets and provide support, as we saw in previous episodes of heightened geopolitical risk. Although external debt has risen for Bahrain and Saudi Arabia, the risks are still in check. The Saudi net external debt position remains small and owing to significant regional deposits at Bahrain's banks, which we expect will remain stable in most scenarios. The UAE and Kuwait remain in a net external asset position. Qatar's external debt has stabilized, and we assume that any unexpected outflows will prompt government support, as occurred during the boycott in 2017.
Related Research
- Your Three Minutes In Saudi Vision 2030: Credit Implications For Banks And Corporates, May 2, 2024
- Your Three Minutes In Banking: Saudi Banks May Turn To Alternative Funding Options, April 30, 2024
- Credit FAQ: What Lies Ahead For UAE Banks In 2024, Feb. 7, 2024
- Credit FAQ: How Will Saudi Banks Fare In 2024?, Feb. 5, 2024
- What A Regional Escalation Could Mean For MENA Banks' External Funding, Nov. 13, 2023
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contacts: | Roman Rybalkin, CFA, Dubai +971 (0) 50 106 1739; roman.rybalkin@spglobal.com |
| Zeina Nasreddine, Dubai + 971 4 372 7150; zeina.nasreddine@spglobal.com | |
| Tatjana Lescova, Dubai + 97143727151; tatjana.lescova@spglobal.com | |
| Puneet Tuli, Dubai + 97143727157; puneet.tuli@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.