GCC banks’ profitability is expected to remain strong in 2024, as the anticipated rate cuts by the US Federal Reserve have been postponed. This delay has benefited banks in the region, as their currencies are pegged to the dollar and they have benefited from the increase in US interest rates in recent years. However, in 2025, banks may experience a slight decline as the Fed could begin cutting rates in December 2024, prompting most GCC central banks to follow suit.
Despite the potential rate cuts in 2025, banks in the GCC region are expected to continue benefiting in 2024. Lower interest rates will reduce borrowing costs and may lead to higher stock prices, ultimately fueling growth in the region. Additionally, the rate cuts are likely to reduce the amount of unrealized losses that GCC banks have accumulated over the past few years, providing further support to their profitability.
In 2023, listed banks in the GCC saw a significant increase in their net profit, with the UAE-listed banks emerging as the top performers. The average return on assets of the top 45 banks in the region also saw an increase at the end of 2023. Despite the positive performance in 2023, markets anticipate one or two interest rate cuts by the Fed and GCC central banks in 2024, which might impact banks with significant corporate lending more than others.
According to S&P Global Ratings credit analyst Mohamed Damak, despite the delays in rate cuts relative to expectations, markets still expect them to occur in the near future. Damak also noted that some banks are more vulnerable than others when rates decline, with banks with significant corporate lending likely to experience a greater impact. Retail banks with certain balance sheet structures may be less affected.
S&P’s analysis suggests that every 100 basis point drop in rates could decrease rated GCC banks’ bottom lines by around nine percent, based on their December 2023 disclosures. Damak also highlighted factors that may mitigate the impact of declining profitability for GCC banks, such as higher volumes compensating for lower margins, and the potential reduction in unrealized losses on investments.
In conclusion, while GCC banks are expected to maintain strong profitability in 2024 due to delayed rate cuts, the potential for lower interest rates in 2025 could impact their bottom lines. It is important for banks in the region to assess their vulnerabilities and implement strategies to mitigate potential risks associated with declining rates. Despite these challenges, supportive economies, contained leverage, and precautionary reserves are expected to help GCC banks weather the changing interest rate environment.
