(MENAFN- The Peninsula)
Deepak John
|
The Peninsula
Doha: The banks in the Gulf Cooperation Council (GCC) region are doing well. They are profitable, benefit from strong asset quality indicators and strong capitalisation, and have sufficient liquidity on their balance sheets.
“We expect this performance will continue in 2025, even though it will likely be modestly affected by lower interest rates. We expect banks will be relatively resilient,” noted S&P Global Ratings recently.
The GCC banks continue to benefit from a strong capitalisation, supporting their overall creditworthiness. Supportive shareholders--dividend payouts tend to be below 50 percent - and strong profitability contributed to stable capitalisation levels.
The quality of capital is also strong, with a relatively limited contribution of hybrid instruments.“We expect banks will likely increase hybrid issuance over 2025-2026 to benefit from lower rates and because several previously issued instruments will reach their first call dates.”
Regarding the steady economic performance and continued lending growth the report noted that“We expect the Brent oil price will average $75 per barrel in fourth-quarter 2024 and over 2025-2027, which will be helpful for most GCC countries.”
The GCC countries will also benefit from the expansion of gas production (Qatar), the implementation of economic transformation projects (Saudi Arabia), reform implementations (Bahrain and Oman), and the non-oil economy's good performance (Bahrain and the UAE).”We think GCC banks will continue to grow their lending books without generating major macroeconomic imbalances. Lending will range from a high 8 percent to 9 percent in Saudi Arabia and the UAE to a modest 3 percent to 6 percent in other GCC countries.
It further said,“We expect the Fed will cut rates by 225 basis points (bps) by the end of 2025 (inclusive of the 75-bps cut already delivered). GCC central banks are likely to mirror these cuts in varying degrees.”
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.
The GCC banks are mainly funded by domestic deposits, which have proved stable through periods of mild stress, such as the COVID-19 pandemic. Public sector deposits typically account for 20 percent to 30 percent of the deposit base.
A previous report by S&P noted that the GCC banks' good performance should continue throughout 2024, absent any unexpected shock, thanks to increasing lending volumes, higher fee income, stable margins, and strong cost efficiency. For 2025, expected rate cuts would trim margins but could be supportive of asset quality.
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