• Home
• /
• Finance
• /
• Business

GCC banks to continue strong performance next year

S&P predicts modest impact of lower interest rates on region's lenders

Banks in the Gulf Cooperation Council (GCC) region are performing well and this is expected to continue next year, a report said on Wednesday.

According to S&P Global’s GCC Banking Sector Outlook 2025, GCC banks benefit from strong asset quality indicators and strong capitalization, and have sufficient liquidity on their balance sheets. However their results are likely be modestly affected by lower interest rates.

However, an unanticipated, severe increase in geopolitical risk or a major decline in oil prices could weigh on banks’ creditworthiness. “Depending on how the scenario unfolds, we expect banks will be relatively resilient. This explains our currently high ratings on GCC banks and the positive outlook bias,” Dr. Mohamed Damak, Managing Director and Sector Lead, Financial Institutions and Emerging Markets at S&P Global, wrote in the report.

S&P analysts are keeping an eye on are energy prices, supply chain disruptions, financial market volatility, external and local capital outflows, and the resumption of inflationary pressures. “While lower interest rates could benefit systems that depend on external funding, banks’ bottom lines could be impaired by lower revenues if the cost of funding or the cost of risk do not decline,” the report said.

S&P expects the Brent oil price to average $75 per barrel in fourth-quarter 2024 and over 2025-2027, which will be helpful for most GCC countries. “In our view, GCC countries will also benefit from the implementation of economic transformation projects (Saudi Arabia), the expansion of gas production (Qatar), reform implementations (Bahrain and Oman), and the non-oil economy’s good performance (Bahrain and the UAE),” Damak said.

Within this context, S&P believes that the GCC banks will continue to grow their lending books without generating major macroeconomic imbalances. Lending will range from a high 8%-9% in Saudi Arabia and the UAE to a modest 3%-6% in other GCC countries, the report said.

Despite the previous shock from the Covid-19 pandemic, the nonperforming loan (NPL) ratio remained at 3%-4% since it benefited from regulatory forbearance measures and the subsequent economic improvement. The write-offs of legacy NPLs also helped. At the same time, banks used the strong post-pandemic profitability to continue to set aside additional provisions, which created a cushion for any potential future shocks, the report said. “We expect asset quality indicators will remain broadly stable over the next 12-24 months,” Damak said. Margins have improved, thanks to higher rates, while cost of risk is inching up in some countries as banks use excess profitability to prepare for potential shocks or to cover for risks related to exposures in nondomestic countries, the report added.

S&P expects the US Federal Reserve to 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. While the overall effect of the rate decline on profitability is negative, S&P believes it could reduce unrealized losses in securities portfolios and the cost of funding for banks that rely heavily on external funding.

UAE banks’ local and external liquidity volumes are high. The system has benefited from the previous materialization of geopolitical risk, S&P noted.