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GCC banks to post strong profits in 2024 amid delay in US rate cuts: S&P

19 May 2024 S&P GCC banks By OUR CORRESPONDENT

Muscat – The delay in interest rate cuts by the US Federal Reserve is positive news for banks in Oman and other GCC countries, whose currencies are pegged to the US dollar, according to S&P Global Ratings.

S&P expects GCC banks’ profitability to remain strong in 2024 due to the delayed US rate cuts. The global rating agency also anticipates that GCC banks’ asset quality will stay resilient despite the prolonged higher rates, thanks to supportive economies, controlled leverage, and substantial precautionary reserves.

‘GCC banks have benefited from the recent monetary policy tightening cycle. Since most GCC central banks typically mirror the Fed’s rate movements to maintain their currency pegs, the delay in rate cuts will boost GCC banks’ profitability. The banks have benefited from the increase in interest rates over the past couple of years, and they stand to continue benefiting in 2024,” S&P said in a report.

On a positive note, S&P believes lower interest rates are likely to reduce the amount of unrealised losses that GCC banks have accumulated over the past couple of years. It estimates these losses at around $2.8bn for the rated GCC banks, or 1.9% on average of their total equity.

S&P now believes that the conditions for the US Fed’s monetary policy easing won’t be in place before autumn 2024.

‘In our view, the Fed won’t cut rates until it sees several consecutive readings of slowing month-over-month core inflation, so its first rate cut will likely occur in December 2024 – several months later than we had previously forecast. We still think that the Fed is likely to pick up the pace of easing in 2025 as economic growth slows below its potential,’ S&P stated. The rating agency projects that the Fed will cut rates by 100 basis points over the course of 2025, reaching 4.00%-4.25% by year-end.

Profitability may drop in 2025

‘We anticipate a slight deterioration in profitability in 2025, as the US Fed could start cutting rates in December 2024, and most GCC central banks are likely to follow suit to preserve their currency pegs. However, we believe that several factors will mitigate the overall effect,’ S&P added.

According to S&P’s estimates, every 100 basis point drop in rates reduces the rated GCC banks’ bottom-lines by an average of around 9%. ‘This is based on the GCC banks’ December 2023 disclosures and assumes a static balance sheet and a parallel shift in the yield curve,’ S&P noted.

In 2025, as interest rates drop, S&P expects GCC banks’ profitability to decline, but several factors are likely to mitigate the overall impact.

The migration of bank deposits back to non-interest-bearing instruments could limit the decline in GCC banks’ profitability. ‘We expect to see a move back to non-interest-bearing instruments if interest rates decline, depending on the magnitude of the decline. We acknowledge that the migration back could take time,’ the rating agency said.

According to S&P estimates, higher lending growth can compensate for lower margins, particularly in markets with significant lending demand, such as Saudi Arabia due to the implementation of Vision 2030 projects.

Furthermore, S&P noted that some GCC banks are more at risk than others when rates decline. Banks with significant corporate lending are likely to see a greater impact.

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