GCC banks expect healthy profits over delay in US interest rate cuts

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A delay in US interest rate cuts means GCC banks can expect healthy profits throughout 2024, according to S&P Global Ratings.

The delay stems from the US Federal Reserve’s wait for signs of slowing inflation. While a rate cut is still on the cards, it’s now expected in December 2024, several months later than previously anticipated.

Since most GCC central banks mirror the Fed’s moves to maintain their currency pegs, higher interest rates for longer translate to higher profits for the banks.

GCC banks have already been enjoying the benefits of rising interest rates, with the average return on assets for the top 45 banks in the region reaching a healthy 1.7 per cent at the end of 2023, up from 1.2pc just two years prior.

However, S&P Global Ratings does predict a slight dip in profitability come 2025 as rates eventually start to fall. But they believe several factors will help soften the blow:

Banks are expected to take steps to adjust their balance sheets before the rate cut, potentially fixing interest rates for some loans or switching variable rates to fixed ones.

As interest rates fall, some depositors may move their money back to non-interest-bearing accounts. This could lessen the impact of lower interest income for the banks.

A decline in interest rates may give companies more financial breathing room, potentially improving their creditworthiness and reducing the need for banks to set aside funds for potential loan defaults.

Higher lending volumes, particularly in areas with significant demand like Saudi Arabia’s Vision 2030 projects, could compensate for lower profit margins on existing loans.

The report also highlights that the impact of falling rates won’t be the same for all banks. Those with a large focus on corporate lending, where rates are typically variable and quickly adjusted, may see a bigger hit to their profits.

While some banks could see a significant drop in profits, others with a more retail-focused balance sheet are likely to weather the storm better.

Overall, the outlook for GCC banks in 2024 remains positive, with the delay in rate cuts offering a welcome boost to their profitability. However, banks will need to adapt their strategies to navigate the changing interest rate environment in the years to come.