GCC banks are expected to maintain their good performance through 2024, driven by factors such as increasing lending volumes, higher fee income, stable margins, and strong cost efficiency. Analysts predict that rate cuts in 2025 could impact margins but support asset quality. However, the banks remain vulnerable to slower economic growth due to various factors such as oil market dynamics and geopolitical risks.
Despite potential challenges, GCC banks have consistently outperformed global counterparts in terms of return on equity and market multiples. Their efficient capital management has given them an edge, with a 3-4 percentage point lead in ROE over the past two years. Non-oil sectors in Saudi Arabia and the UAE have driven lending growth for GCC banks, with margins remaining stable at 2.7 percent.
NIBs have declined from 45 percent at the end of 2023 to support steady non-oil growth. Asset quality metrics have remained strong, with cost of risk at 60-70 basis points. The banks have maintained profitability, with return on assets strengthening to 1.74 percent in the first half of 2024. Analysts expect the Federal Reserve rate cuts to impact GCC banks’ bottom line, but measures to control costs may mitigate the decline.
GCC banks have capitalized on elevated interest rates, generating substantial shareholder value and outperforming global banks in terms of net interest margins and revenue-to-assets ratios. However, McKinsey warns that the strong performance driven by high interest rates may breed complacency among bank managers, hindering ambitious transformation agendas. Despite potential risks, GCC banks are well-positioned to navigate geopolitical challenges and adverse impacts, barring extreme scenarios.
Overall, the outlook for GCC banks remains positive, with the potential for challenges like rate cuts and geopolitical risks to be managed effectively. Strong performance, efficient capital management, and steady non-oil growth continue to support the resilience of GCC banks in the face of economic uncertainties. By adapting to changing market conditions and implementing transformation agendas, GCC banks can further enhance their performance and maintain their competitive edge in the banking sector.
