Saudi and the UAE Banks to Continue Their Growth in 2024

Supported by robust credit demand in non-oil sectors and economic diversification pogrammes, the Saudi banking system is poised well for continued growth this year, according to a report from S&P Global Ratings.

The report entitled “GCC Banking Sector Outlook 2024” said that the GCC banks, on the whole, are projected to maintain solid capitalisation, profitability, provisioning, and liquidity due to broad stability in key metrics across GCC banks and banking systems in 2024.

“Credit growth will moderate slightly on the back of an unfavourable base effect and a more cautious approach to lending and this comes amid a persistent high interest rate environment and uncertain external macroeconomic conditions,” S&P Global said in the report.

Among all banks in the GCC, Saudi and the UAE are expected to have the strongest return on assets (RoA) during the year, with high levels of capitalisation making them favourable when compared with regional or global peer groups.

“The UAE and the Saudi banking systems are poised to continue their growth above the rest of the region, with strong credit demand led by a dynamic non-oil sector and economic diversification programs. We also expect credit growth in Oman to remain robust,” the report noted.

The key risks to the outlook that we see but don’t expect include the worsening geopolitical environment, exposure to higher-risk jurisdictions (including Egypt and Turkiye), oil price volatility, and real estate exposure.

Macro Environment

Though the GCC banks interest rates are expected to remain high, they are likely to fall by 1% by the end of the year, in step with the US FED Inflation will remain close to target and contained by price administration measures.

“Despite volatile supply-demand dynamics, we expect oil prices to remain broadly stable over 2024, which we believe will support continued fiscal expenditure. Ongoing or worsening geopolitical tensions pose a risk to this assumption, but weaker-than-expected growth in China could pose downside risks to oil prices, dent sentiment, and lead to some fiscal strain in sovereigns with higher fiscal break-even prices,” the report said.

 The economic environment will support credit demand and it is anticipated that only slightly slower credit growth overall (partly as a base effect but also as banks increase lending caution). This will support profitability, but margins will likely start to narrow by the end of the year, reflecting the lagged impact of anticipated interest rate and higher funding costs.

Banking Sector

We regard to asset quality among the GCC banks, they will be relatively strong and do not expect much deterioration, given high levels of precautionary provisioning. Leverage is contained but still-high rates will keep cost of risk elevated, particularly in banks with larger exposure to entities that do not depend on government cash flows.

GCC banks’ capitalisation levels will continue to support their creditworthiness in 2024. S&P Global forecast its RAC ratios to strengthen slightly in all GCC countries aside from in Saudi Arabia, where fastest growth is expected.

Banks are predominantly funded through strong local deposit franchises for countries like the UAE, Kuwait, and Oman, although for Oman, one-third of customer deposits come from the government and their related entities. Liquidity strains could emerge in externally levered systems like Qatar and could rise where domestic funding is growing slower than credit.

Geopolitical Risks

S&P Global also viewed that the regional and global geopolitical environment as complex and worsening. The geography of the Israel-Hamas conflict is widening and proxy conflicts, which have previously directly involved GCC states, pose a potential route for further escalation.

“These could impair sentiment, investment, and capital flows, but we do not expect an event that would test financial stability. The GCC banking systems and regional governments generally have strong net external positions and can withstand or offset significant outflows of foreign funding,” the report said.

Risks in the Egypt appear to be abating and the loss scenario shows exposures are relatively contained at the system level. Still, recent expansion by individual GCC banks in both countries is material and exposures total around $160 billion.

The GCC banks’ exposures in these jurisdictions as high-risk and this estimated total is equivalent to about 7% of exposed group assets as the GCC bank subsidiaries in Turkiye account for an estimated $105 billion, the report said.