Gulf Banks Set for Continued Profit Surge in 2024

Good news for Gulf Cooperation Council (GCC) banks:credit rating agency S&P Global Ratings predicts their profitability will stay robust throughout 2024. This positive outlook comes despite a delay in interest rate cuts by the US Federal Reserve.

The strong performance is largely attributed to the mirroring effect between GCC central banks and the Fed. Since most GCC currencies are pegged to the US dollar, their central banks typically adjust rates in line with the Fed’s decisions. With the Fed postponing rate cuts, GCC banks can continue reaping the benefits of higher interest rates, which translates to increased income from loans and other interest-bearing assets.

S&P Global Ratings highlights the positive impact of this trend on the region’s banks. They point to a significant rise in the average return on assets for the top 45 GCC banks at the end of 2023. This metric, which reflects a bank’s profitability relative to its assets, jumped from 1. 2% in 2021 to 1. 7% in 2023.

While the report acknowledges a potential decline in profitability in 2025, analysts believe the impact will be mitigated. This softening is anticipated if the Fed initiates rate cuts by December 2024, a move likely to be mirrored by GCC central banks. However, S&P Global Ratings emphasizes several factors that will help cushion the blow.

Firstly, supportive economic conditions in the GCC region are expected to continue. This translates to a healthy borrowing environment for banks, with businesses and individuals likely to maintain their demand for loans.

Secondly, the report underscores the importance of contained leverage within GCC banks. This means they haven’t been overly reliant on borrowed funds to finance their operations, making them less vulnerable to fluctuations in interest rates.

Finally, S&P Global Ratings highlights the significant precautionary reserves held by GCC banks. These reserves act as a buffer against potential financial shocks, including those that might arise from future interest rate adjustments.

In conclusion, S&P Global Ratings paints a promising picture for GCC banks in 2024. The delay in US interest rate cuts, coupled with strong regional economies and prudent financial management by the banks themselves, is expected to fuel continued profitability throughout the year. While some softening might occur in 2025, the report suggests that the impact will be cushioned by various mitigating factors.