Tue, Dec 03, 2024 | Jumada al-Aakhirah 2, 1446 | DXB 0°C

Further rates cuts to hit most GCC banks’ earnings

Most GCC banks are geared to rising rates, with assets repricing faster than liabilities

Published: Thu 17 Oct 2024, 4:40 PM

By
Issac John

Interest rate cuts expected in a phased manner from fourth quarter of 2024 will be negative for most GCC banks’ earnings due to the faster repricing of interest-earning assets (IEAs) than interest-bearing liabilities, Fitch Ratings says.

Analysts at Fitch Ratings, however, expect interest rates in the GCC to remain relatively restrictive, and believe that rate cuts are unlikely to be large enough to affect banks’ viability ratings. “The main risk to viability ratings could be lower-than-expected oil prices (Fitch assumes $70/barrel in 2025 and $65/barrel in 2026), which could tighten liquidity and weaken economic conditions in the region,” Fitch analysts said.

Last month, the US Fed opted to go big with its first interest rate cut in four years, slashing the Fed funds target by 50 basis points (bps) to 4.75–5.0 per cent. This dovish move signals the end of the “higher-for-longer” era of interest rates — and the beginning of a new monetary easing cycle that could last beyond 2025.

JPMorgan Research expects the Fed to cut rates by another 50 bps at its next meeting in early November. This diverges from the Fed’s “dot plot” — a chart that records each Fed official’s projection for short-term interest rates — which points to two additional 25 bp cuts this year.

Fitch expects the Fed to cut US interest rates by a further cumulative 200bp by June 2026, and most GCC central banks are likely to follow with similar cuts due to exchange-rate pegs.

Ramy Habibi Alaoui, associate director, Financial Institutions – Banks, and Redmond Ramsdale, senior director and head of Middle East Banks Ratings and Islamic Banking, both of Fitch Ratings, said UAE banks are likely to be the most affected while Saudi banks are likely to be less hard hit due to their higher proportion of fixed-rate financing, although the impact for each bank will depend on its level of retail financing.

Most GCC banks are geared to rising rates, with assets repricing faster than liabilities and a high proportion of low-cost current and savings account deposits. “We estimate that the short-term positive repricing gap for GCC banks (excluding Kuwaiti banks) represented 6.6 per cent of total assets at end-2023, with about 60 per cent of IEA repricing within 12 months,” Fitch analysts said.

“This has underpinned the strong recovery in banking performance since rates started rising in 2022. However, earnings will be negatively affected as the rate cycle turns,” they said.

Saudi and UAE banks reported average net interest margin (NIM) declines of 50bp and 60bp, respectively, during the last monetary easing cycle in 2019-2021, when the Fed cut rates by 150bp.

Saudi banks will not be affected in the same way by rate cuts this time due to lower reliance on current and savings account deposits (53.3 per cent of customer deposits at end-1H24; 61.2 per cent at end-2019) and greater exposure to fixed-rate long-duration mortgages (23.3 per cent of total financing at end-1H24; 12.8 per cent at end-2019).

In the UAE and Bahrain, more than 60 per cent of banks’ IEAs were set to reprice within 12 months. This compares with 44 per cent and 52 per cent in Saudi Arabia and Oman, respectively, where there are higher proportions of fixed-rate retail exposures.

Fitch’s review of 46 GCC banks’ sensitivity analyses suggests that average NIM sensitivity to a 100bp rate cut is greatest in Kuwait, followed by the UAE, Qatar and Oman. “We estimate that a 100bp rate cut would erode average NIMs by 28bp for Kuwaiti banks, 17bp for UAE banks and 7bp for Qatari and Omani banks,” they said.