S&P thinks the UAE and Saudi banking systems are poised to continue their growth above the rest of the region, and expect credit growth in Oman to remain robust
S&P Global Ratings forecasts credit growth and profitability will remain strong for Gulf Cooperation Council (GCC) banks and banking systems in 2024, but anticipates a slight softening from 2023 levels.
“In general, the region’s banks should exhibit broad stability across key metrics in 2024 and continue to stand out as being well capitalised, profitable, well provisioned, and (for the most part) liquid,” S&P said in a report, entitled “GCC Banking Sector Outlook 2024: A Relative Bright Spot Among Emerging Markets”.
S&P thinks the UAE and Saudi banking systems are poised to continue their growth above the rest of the region, and expect credit growth in Oman to remain robust.
Key risks
The key risks to the outlook that S&P sees (but doesn’t expect) include the worsening geopolitical environment, exposure to higher-risk jurisdictions (including Egypt and Turkiye), oil price volatility, and real estate exposure.
The report said headline real GDP growth is expected to accelerate in all GCC countries in 2024 aside from Bahrain. Non-oil growth should remain particularly dynamic in Saudi Arabia and the UAE.
“We expect GCC interest rates will remain high but fall by 1% by the end of the year, in step with the US Fed. Inflation will remain close to target and contained by price administration measures.”
Notwithstanding volatile supply-demand dynamics, S&P expects oil prices to remain broadly stable over
2024, which will support continued fiscal expenditure. Ongoing or worsening geopolitical tensions pose a risk to this assumption, but weaker-than-expected growth in China could pose downside risks to oil prices, dent sentiment, and lead to some fiscal strain in sovereigns with higher fiscal break-even prices.
Supporting credit demand
The economic environment will support credit demand and S&P anticipates only slightly slower credit growth overall (partly as a base effect but also as banks increase lending caution). This will support profitability, but margins will likely start to narrow by the end of the year, reflecting the lagged impact of anticipated interest rate and higher funding costs.
S&P regards asset quality in the GCC as relatively strong and does not expect much deterioration, given high levels of precautionary provisioning. Leverage is contained but still-high rates will keep cost of risk elevated, particularly in banks with larger exposure to entities that do not depend on government cash flows.
GCC banks’ capitalisation levels will continue to support their creditworthiness in 2024. “We forecast our RAC ratios to strengthen slightly in all GCC countries aside from in Saudi Arabia, where we expect the fastest growth.”
Banks are predominantly funded through strong local deposit franchises for countries like UAE, Kuwait, and Oman, although for Oman, one-third of customer deposits come from the government and their related entities. Liquidity strains could emerge in externally levered systems like Qatar and could rise where domestic funding is growing slower than credit.
Source : Zawya
