The profitability of GCC banks will remain strong in 2024 thanks to the delay in US Federal Reserve interest rate cuts, S&P said in a report.

The Fed’s delay in interest rate cuts is “good news” for GCC banks, the global ratings agency said.

Lower rates will likely reduce the unrealised losses that GCC banks have accumulated over the past couple of years. The estimated losses are around $2.8 billion for the GCC banks rated by S&P, or 1.9% on average of their total equity.

The banks have benefited from the increase in interest rates over the past couple of years and stand to continue benefiting in 2024. At year-end 2023, the average return on assets of the top 45 banks in the region reached 1.7%, up from 1.2% at year-end 2021.

However, profitability is expected to slightly deteriorate in 2025, as the Fed could start cutting rates in December 2024. Most GCC central banks will likely follow suit to preserve their currency pegs.

“Every 100-basis point (bp) drop in rates shaves an average of around 9% off rated GCC banks’ bottom lines,” the rating agency said.

The Fed will not cut rates until it sees several consecutive readings of slowing month-on-month core inflation, so the first-rate cut will likely occur in December 2024.

“We project that the Fed will cut rates by 100 basis points over the course of 2025 to reach 4-4.25% at year-end,” S&P noted.   

(Editing by Brinda Darasha;