S&P Global Rating released a report stating that the banking industry in the Gulf Cooperation Council (GCC) region will maintain strong performance in 2025. The report predicts that the Federal Reserve will cut interest rates by a cumulative 225 basis points by the end of 2025, which may have a negative impact on the profitability of GCC banks, but the overall situation is manageable. The report also forecasts that the average price of Brent crude oil in 2025 will be $75 per barrel, leading to an expansion of bank loan business while maintaining stable asset quality.
According to the "GCC Banking Outlook 2025" report published by S&P Global Rating, despite the potential impact of the Federal Reserve's interest rate cuts, the banking sector in the Gulf Cooperation Council (GCC) region will continue to show strong performance in 2025.
The report points out that banks in the GCC region have strong asset quality, healthy capital levels, and ample liquidity, and these advantages will continue to support the growth of the banking industry in 2025.
Impact of Interest Rate Cuts
Despite S&P's prediction that the Federal Reserve will cut interest rates by a total of 225 basis points by the end of 2025 (including the current 75 basis points cut), central banks in the GCC countries may also follow suit, negatively impacting the profitability of banks.
However, the report also believes that this impact will be within a manageable range, especially for banks that rely on external financing, as rate cuts will help reduce their financing costs and unrealized gains and losses on securities portfolios.
"According to our estimates, (further rate cuts by the Federal Reserve) will have an average impact of 25-50 basis points on bank profit margins, as follows: Bahrain 20-30 basis points, Kuwait 30-50 basis points, Oman 10-20 basis points, Qatar +/-10 basis points, Saudi Arabia 20-30 basis points, UAE 40-60 basis points," the report added.
Oil Price and Loan Business
The report points out that by the fourth quarter of 2024, the average price of Brent crude oil is expected to be around $75 per barrel, and will maintain this level between 2025 and 2027, benefiting most GCC economies.
In addition, the economic diversification efforts in various Middle Eastern countries, including Saudi Arabia's economic transformation initiatives, Qatar's expansion of natural gas production, Bahrain and Oman's economic reforms, and the good performance of non-oil economies in some countries, will further support the development of the banking industry.
Against this backdrop, the report believes that banks in various countries will continue to expand their lending businesses in 2025, without significant macroeconomic imbalances. Loan rates will range from 8%-9% in Saudi Arabia and the UAE to 3-6% in other countries.
Asset quality stable.
Despite the pressure of oversupply in the real estate industry in markets like Qatar post-World Cup, the report expects asset quality indicators for GCC region banks to remain stable in the next 12 to 24 months.
Furthermore, the report also mentions that banks in the GCC region primarily rely on domestic deposits, which demonstrate resilience in times of mild stress (such as during a pandemic). Public sector deposits typically account for 20%-30% of total deposits.
Overall, according to the s&p global report, despite some risks, the banking sector in the GCC region demonstrates extremely high efficiency driven by low labor costs and increasing digitization, laying the foundation for strong growth and resilience in 2025.
