GCC banks set for strong performance through 2024 despite potential challenges

Banks in the Gulf Cooperation Council are projected to maintain their robust performance throughout 2024, according to S&P Global Ratings. The positive outlook comes after a solid first half of the year, driven by increasing lending volumes, higher fee income, stable profit margins, and strong cost efficiency.

In its latest report, S&P highlighted that the top 45 GCC banks saw an annualized lending growth of 10.4% in the first half of 2024, up from 6.7% in 2023.

This growth was largely supported by the expansion of non-oil sectors in key economies like Saudi Arabia and the UAE. Profit margins have remained stable at 2.7%, benefiting from a prolonged period of high interest rates, while return on assets improved to 1.74% from 1.65% at the end of last year.

S&P expects the GCC banking sector’s strong performance to persist throughout the year, barring any unexpected shocks. Conservative dividend payouts are expected to bolster the capital reserves of these banks, further strengthening their ability to navigate potential economic challenges.

Despite this optimistic outlook, GCC banks face potential headwinds due to fluctuating oil production and prices, the possibility of a correction in real estate markets, and geopolitical risks. Slower economic growth stemming from these factors could pose risks to the banking sector.

In addition, S&P warned that the expected interest rate cuts by the U.S. Federal Reserve could impact profitability. The agency forecasts a 150 basis points (bps) reduction in rates between September 2024 and the end of 2025, which could reduce the bottom line of GCC banks by 12%, based on 2023 figures. Each 100-bps rate cut is estimated to lower net income by 8%.

While challenges remain, S&P concluded that GCC banks’ strong cost efficiency, high capitalization levels, and strategic positioning will help them weather potential economic turbulence in the coming year.