Gulf Banks’ Profitability to Remain Strong in 2024 Despite Delay in US Fed Rate Cuts
In a recent analysis by S&P Global Ratings, it has been predicted that the delay in interest rate cuts by the US Federal Reserve will have a positive impact on the profitability of Gulf Cooperation Council banks in 2024.
Central Banks in GCC Expected to Maintain Rate Movements in Line with US
Most GCC central banks tend to follow the rate movements set by the US Federal Reserve to ensure the stability of their currency pegs, making the recent decision by the Fed to keep rates unchanged significant for the region.
Asset Quality to Remain Strong Despite Prolonged High Interest Rates
Despite the extended period of high interest rates, S&P Global Ratings anticipates that the asset quality of GCC banks will remain robust due to supportive economies, controlled leverage, and a high level of precautionary reserves.
Anticipated Deterioration in Profitability in 2025
While profitability is expected to remain strong in 2024, S&P Global Ratings foresees a slight deterioration in 2025 as the US Fed and GCC central banks are likely to start cutting rates to maintain currency pegs.
Effects of Rate Cuts on Banks’ Bottom Lines
S&P Global Ratings revealed that a 100-basis point drop in rates could potentially reduce the bottom lines of GCC banks by around 9%, based on the assumptions of a fixed balance sheet and a parallel shift in the yield curve.
Impact of Lower Rates on Unrealized Losses and Profitability
Lower rates are expected to decrease the unrealized losses accumulated by GCC banks and improve their profitability, with S&P estimating these losses to be around $2.8 billion for the banks they rate.
Future Rate Cut Expectations and Mitigating Factors
S&P Global Ratings projects that the Fed will cut rates in 2025, leading to a decline in GCC banks’ profitability. However, management responses, changes in deposit behavior, lower risk costs, and increased lending growth are likely to offset some of the negative impacts.
The recent decision by the Fed to maintain rates was influenced by a lack of progress towards their inflation target, indicating a cautious approach towards future rate cuts.