Brent oil price will average $75 per barrel in the fourth quarter of 2024 and over 2025-2027, which will be helpful for most GCC countries
The banking sector in the Gulf Cooperation Council (GCC) region has been doing well. Banks have reported strong profitability and asset quality indicators in addition to strong capitalization and sufficient liquidity. This performance is expected to continue next year despite lower interest rates potentially impacting growth.
However, an unanticipated, severe increase in geopolitical risk or a major decline in oil prices could weigh on the GCC banking sector’s creditworthiness.
In its latest GCC Banking Sector Outlook 2025, S&P Global Ratings says that while it does not expect a full-scale regional war in the Middle East, a significant escalation could derail the macroeconomic environment in the region. As for interest rates, the agency expects lower rate to benefit systems that depend on external funding. However, banks’ bottom lines could be impaired by lower revenues if the cost of funding or the cost of risk does not decline.
Oil prices, projects to support growth
We expect the Brent oil price will average $75 per barrel in the fourth quarter of 2024 and over 2025-2027, which will be helpful for most GCC countries.
“In our view, GCC countries will also benefit from the implementation of economic transformation projects (Saudi Arabia), the expansion of gas production (Qatar), reform implementations (Bahrain and Oman), and the non-oil economy’s good performance (Bahrain and the UAE),” added the report.
In this context, the GCC banking sector will continue to grow its lending books without generating major macroeconomic imbalances. Lending will range from a high 8-9 percent in Saudi Arabia and the UAE to a modest 3-6 percent in other GCC countries.
Asset quality to remain stable
Despite the previous shock from the COVID-19 pandemic, the non-performing loan ratio remained at 3-4 percent, benefiting from regulatory forbearance measures and the subsequent economic improvement. The write-offs of legacy NPLs also helped. At the same time, the GCC banking sector used the strong post-pandemic profitability to continue to set aside additional provisions, which created a cushion for any potential future shocks.
“We expect asset quality indicators will remain broadly stable over the next 12-24 months. Pressures remain in markets such as Qatar, where the real estate sector continues to suffer from oversupply after the World Cup in 2022,” added S&P.
Margins have improved due to higher rates, while the cost of risk is inching up in some countries as banks use excess profitability to prepare for potential shocks or to cover for risks related to exposures in non-domestic countries. However, banks in the region continue to display strong efficiency, which benefits from low labor costs and increasing digitalization.
Rate cut implications
S&P Global expects the Federal Reserve to cut rates by 225 basis points by the end of 2025. GCC central banks will likely mirror these cuts in varying degrees. The overall effect of the rate decline on profitability is negative. However, it could reduce unrealized losses in securities portfolios and the cost of funding for banks that rely heavily on external funding.
“Based on our assumption that interest rates will decline by 225 bps by year-end 2025,we expect an average impact of about 25-50 bps on GCC banks’ margins, with the following variations: 20-30 bps for Bahrain, 30-50 bps for Kuwait, 10-20 bps for Oman, +/-10 bps for Qatar, 20-30 bps for Saudi Arabia, and 40-60 bps for the UAE,” added the report.
In case the regional conflict impacts the region, the GCC banking sector appears resilient to external and domestic private sector deposit outflows. Only Qatar recorded a small deficit for external funding because of its weaker starting point. All banking systems have sufficient liquidity to withstand local deposit outflows. They even have an extra $264 billion in liquid assets that they can deploy.
Source: economymiddleeast