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The profitability of GCC banks is on track to remain robust this year thanks to the US Federal Reserve delaying interest rate cuts, S&P Global said in a report. The monetary tightening cycle has served banks in the Gulf, where central banks mirror rates due to their currencies being pegged to the USD, S&P notes. Banks’ asset quality is also expected to remain strong on the back of “supportive economies, contained leverage, and a high level of precautionary reserves.”
In context: The Federal Reserve kept rates unchanged earlier this month, with Fed boss Jay Powell making it clear that the central bank is in no hurry to start cutting rates after a surprise uptick in US inflation this year. “It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2% inflation,” Powell said. “I don’t know how long it will take.”
By S&P Global’s math: Cutting rates by 100 basis points would trim rated Gulf banks’ net income by c. 9%, S&P Global said, basing its calculation on banks’ disclosures at year-end 2023. However, lower interest rates help banks slash unrealized losses that have been accumulated throughout the past years, S&P Global said, estimating these losses at c. USD 2.8 bn.
Expect the GCC bank profitability to take a hit in 2025, as the Fed could start cutting rates in December, S&P Global said. However, the report sees some factors helping to alleviate the impact on banks’ bottom lines, including a repositioning of banks’ balance sheets through fixing interest rates at current levels or swapping variable rates for fixed ones before the Federal Reserve starts cutting rates. It also sees deposit migration to interest-bearing instruments in some of Gulf markets helping weaken the impact.
Other factors include a forecast lower cost of risk for lenders, with S&P Global seeing firms having “additional breathing room that could help their creditworthiness and ultimately reduce banks’ provisioning needs” due to banks repricing corporate loans on the back of the potential interest rate cuts. It also sees higher volumes of lending make up for lower margins, especially in Saudi which is seeing growth in lending volumes due to its diversification plan.
Some will be impacted more than others due to interest rate cuts: S&P Global sees Gulf banks with high volumes of corporate lending more likely to be at risk than their peers as they reprice loans. It said the “most vulnerable bank” in its sample is expected to have c. 30% of its net income shaved with every 100 bps cut in rates.
