Good news for investors in the Gulf Cooperation Council (GCC) banking sector:a recent report by S&P Global Ratings predicts strong profitability for these banks throughout 2024. This positive outlook hinges on the US Federal Reserve's decision to delay interest rate cuts, a move that directly impacts GCC banks due to their pegged currencies.
The report, titled "Your Three Minutes In Banking:When Rates Drop, GCC Banks' Profitability Will Follow, " highlights the crucial role of interest rates in shaping the financial health of GCC banks. Historically, these banks have benefited from rising interest rates, allowing them to widen the spread between what they charge borrowers and what they pay depositors. This translates to increased profit margins.
S&P Global Ratings credit analyst Mohamed Damak explains, "The delay in rate cuts by the Fed is a positive development for GCC banks. We expect their profitability to remain robust throughout 2024 due to this factor. " Damak further emphasizes that asset quality, a key indicator of a bank's financial health, is also expected to remain resilient. This resilience stems from a combination of factors, including supportive economic conditions within the GCC, banks' controlled leverage ratios, and their existing reserves set aside for potential loan defaults.
However, the report also cautions of a potential shift in profitability beyond 2024. S&P Global Ratings anticipates that the Fed might begin lowering rates by December 2024, a move that GCC central banks would likely mirror to maintain their currency pegs. This scenario could lead to a slight decline in profitability for GCC banks in 2025.
Despite the potential future slowdown, the current outlook for 2024 remains optimistic. The report underscores the strength of GCC banks' capitalization levels, which are expected to improve further this year. This robust financial standing bolsters their creditworthiness and overall rating strength.
Looking ahead, the long-term performance of GCC banks will likely hinge on a number of factors, including global economic trends, regional economic diversification efforts, and the overall interest rate environment. However, in the immediate term, S&P Global Ratings' report suggests a positive year for investors in the GCC banking sector, fueled by the continued strength of interest rates.