Bucking the trend: 2024 GCC banking outlook

Vijay Valecha, Special to the Gulf Business Jan 6, 2024

Moody’s projected that GCC banks’ liquidity buffers will stay ample this year and profitability will remain strong in stark contrast to the global market, where profit is expected to plunge on higher funding costs, lower loan growth and loan-loss provisioning needs.

Banks in the Gulf region have weathered several storms in recent years from the 2008/09 global financial meltdown to last year’s banking crisis that culminated in the collapse of three US regional banks and Swiss banking giant Credit Suisse.

However, despite the volatility in the global market, regional banks are benefitting from strong operating conditions supported by high oil prices, contained inflation and high-interest rates.

“We are of the view that banks in the GCC will continue to perform well in 2024 after showing a stellar performance in 2023,” says Mohamed Damak, managing director at S&P Global Ratings.

“Banks have benefited from the increase in interest rates in 2023 and the relatively supportive non-oil economies in most GCC countries.”

Digital transformation is the future of the GCC region’s banking sector. By automating processes and leveraging innovative technologies such as generative artificial intelligence (GenAI), banks can reduce their reliance on manual labour and lower operating costs.

“The integration of GenAI into banking operations has the potential to revolutionise the industry by enhancing efficiency, customer experience, and decision-making processes,” observes Abbas Basrai, partner and head of Financial Services at KPMG Lower Gulf.

GenAI dominated the financial services technology conversation in 2023, and the debate is set to continue this year. Global accounting firm Deloitte said in its 2024 banking outlook report that the impact of GenAI, industry convergence, embedded finance, open data, digitisation of money and digital identity will increase this year.

GCC banks are also leveraging innovative technologies and GenAI to assess the sustainability of their lending portfolios and develop new sustainable finance products and services.

Meanwhile, sustainability has become a topic of crucial importance for many corporations in the GCC region, financial institutions included. One reflection of this is the UAE banking sector’s pledge to mobilise $270bn (Dhs1tn) in green finance by 2030.

Vijay Valecha chief investment officer at Century Financial says the pledge by UAE banks at COP28 signifies a pivotal moment in the financial industry, where sustainability takes centre stage.

The latest data shows that the outlook of the Gulf region has strengthened, with a 3.6 per cent GDP growth projected in 2024, driven by robust oil prices and the improvement in non-oil activity.

From an Islamic banking perspective, Redmond Ramsdale, Fitch Ratings’ head of Middle East Bank Ratings and Islamic Banking says the GCC region’s real GDP growth in 2024, together with non-oil sector growth of about 3.5 per cent, will support moderate financing growth.

It is worth noting that economic growth in the Gulf region is mirrored in the performance of the banking sector, which is experiencing a period of much-welcomed profitability.

An enabling environment

The GCC banking sector remains unscathed by the global financial turmoil, owing to regional banks’ solid liquidity buffers, and low-cost and stable customer deposits.

Asad Ahmed, managing director and head of Middle East Financial Services at Alvarez & Marsal highlights that banks in the Gulf region have proven to be more resilient to market challenges than their global counterparts.

“From where we are today, we expect 2024 to be a stable year for banks, net interest margin will show slight downward movement as interest rates begin to decline; cost of credit is likely to show some increase if the continued higher rates affect credit quality; return on equity and return on assets are unlikely to show any major surprises,” he explains.

Despite a projected deterioration in asset quality indicators and an increase in the cost of risk, GCC banks will report stronger profitability in 2024 supported by higher margins from higher rates, increased business volumes and lower loan-loss provisions.

“Profitability will continue to benefit from higher interest rates in 2024, supported by high levels of low-cost deposits and muted financing impairment charges. Fitch does not expect the US Treasury to start cutting rates, impacting the GCC, until at least mid-2024, and this is likely to be very gradual,” adds Ramsdale.

The region’s top five lenders – Saudi National Bank, Al Rajhi Bank, Qatar National Bank, First Abu Dhabi Bank and Kuwait Finance House – posted $1.34tn in combined net assets in the nine months to September 30 and Moody’s said profitability will remain strong in 2024 after record profits last year.

Source:

Gulf Business