RIYADH: Gulf Cooperation Council banks are set for strong performance through the remainder of 2024, driven by a 10.4 percent increase in lending during the first half of the year, a report claims.
S&P Global attributes this loan growth, up from 6.7 percent in 2023, to robust activity in non-oil sectors across Saudi Arabia and the UAE.
The top 45 GCC banks showed this annualized growth, reflecting heightened economic activity outside the oil industry.
The analysis indicates that this elevated lending growth will support the sector in managing potential economic uncertainties for the remainder of the year.
This comes as GCC countries prioritize expanding their non-oil sectors to diversify economies and reduce reliance on volatile oil revenues, driven by global energy transitions, fluctuating oil prices, and the need for sustainable growth.
“We expect sustained strong performance over the remainder of the year will help GCC banks navigate potential turbulence,” stated S&P Global.
The report also states that while higher-for-longer interest rates have kept bank margins stable at 2.7 percent, the migration of deposits from non-interest-bearing instruments to remunerated accounts continues.
NIBs accounted for 45 percent of total deposits at the end of 2023, down from 48 percent a year earlier, and have continued to decline.
Despite this, steady growth in the non-oil sectors has supported asset quality metrics, with cost of risk maintained between 60-70 basis points.
“These developments enabled the banks to maintain strong profitability in the first half, with return on assets strengthening to 1.74 percent, from 1.65 percent at end-2023,” it added.
The report suggests that conservative dividend payouts will further bolster banks’ capital positions, with the average Tier 1 ratio, a bank’s core equity capital to its total risk-weighted assets, standing at 17.1 percent as of June 30, 2024, compared to 17.3 percent at the end of 2023.
However, S&P Globals noted that challenges persist in some sectors.
“Still-muted real estate performance in Qatar and Kuwait-notably due to oversupply and subdued demand, respectively-could present risks for those banking sectors,” the report warns.
Nonetheless, strong provisions in Kuwait and the Qatari government’s role in the economy are expected to support resilience.
Looking ahead, the report highlights that a projected rate cut by the US Federal Reserve of 150 bps between September and the end of 2025 could reduce GCC banks’ net income by approximately 12 percent, based on 2023 figures.
Despite this potential impact, the report suggests that cost control measures may soften the blow, with the rate cuts likely to provide relief to highly leveraged corporates and retail clients. This could help maintain asset quality across the region’s banks.
Geopolitical risks, while present, are not expected to disrupt the region’s banking systems, it added.
GCC sovereigns and banks are deemed well-positioned to manage potential fallout, barring extreme scenarios such as the closure of major export routes or significant threats to domestic security.
“A sharp increase in uncertainty could trigger detrimental capital outflows or prompt sovereigns to liquidate external assets and provide support,” the report notes, but it highlights the preparedness of sovereigns, particularly in Saudi Arabia, Bahrain, the UAE, and Kuwait, to navigate such risks.
The report further states that despite elevated external debt in Bahrain and Saudi Arabia, overall risks remain manageable due to stable regional deposits and robust government support mechanisms.
