Daily Update: Outlook for Banks in Gulf Cooperation Council States
Today is Thursday, January 16, 2025, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
The Gulf Cooperation Council (GCC) was formed in 1981 to promote political and economic alignment between the Persian Gulf countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The members of the GCC have broad economic alignment due to the dominance of the fossil fuel industry in each country’s economy and their currencies being effectively pegged to the US dollar. This reduces each country’s scope for monetary independence but aligns these export-driven economies with the default currency of international trade. As a result of these close economic ties, the banking industry across GCC countries is broadly aligned, with some country-level variability resulting from economic diversification efforts.
The net interest income of banks is partly determined by factors that the banks can control — such as the structure of their fixed-income investment books and overall liquidity position, their lending mix and risk appetite, and their mix of funding instruments. However, banks cannot control factors such as policy rates, government bond yields, competition between banks and nonbank financial institutions, or customer price sensitivity/inertia.
According to S&P Global Ratings, banks in the GCC can anticipate higher lending growth and a lower cost of risk that will compensate for declining margins. GCC bank margins will decline mainly due to declines in net interest margins as central banks across the region cut their rates to maintain their peg to the US dollar. Lending growth will improve in most of the GCC due to strong deposit growth. The cost of risk will decrease for GCC banks due to past precautionary provisioning. S&P Global Ratings projects that geopolitical risk will remain in check and that even if geopolitical issues persist or increase, banks in the region are well positioned to weather the storm.
Performance at GCC banks will vary by country. In Kuwait and Qatar, there is apparent overexposure to the real estate sector for banks. In Kuwait, easing visa restrictions may increase demand and prices for real estate. In Qatar, much of the real estate oversupply was due to construction associated with hosting the World Cup. S&P Global Ratings anticipates that lower interest rates will help stimulate demand for Qatari real estate and that interest rate cuts in Bahrain will improve the quality of banks’ real estate assets.
For Saudi Arabia, deposit growth appears to be slowing, increasing reliance on external funding. Vision 2030 projects in Saudi Arabia have substantial funding requirements. Banks in the United Arab Emirates have benefited from a strong domestic economy, leading to improved asset quality metrics and lower credit losses. Qatar has also benefited from strong growth in its hydrocarbon economy, which has helped to support credit growth in that country. S&P Global Ratings forecasts that these trends should continue through 2025.
Today is Thursday, January 16, 2025, and here is today’s essential intelligence.
Written by Nathan Hunt.
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A visionary and results-driven leader in sustainable development and public service, specializing in Bold Strategic AI (SAI) Leadership to drive innovation, efficiency, solutions, and positive global impact.
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