Saudi Arabia, UAE Banking Sectors To Grow Faster Than Rest Of Gulf Region In 2024
The UAE and Saudi Arabia’s banking systems are set to grow faster than the rest of the Gulf region this year, a new report finds, citing strong credit demand led by non-oil sector and economic diversification programmes.
S&P Global Ratings’ GCC Banking Sector Outlook 2024 found that the region’s banks will continue to stand out as being well-capitalised, profitable, well-provisioned, and liquid.
Real GDP will expand at a faster pace in 2024 for all Gulf nations except Bahrain, according to the report.
Economic activity is projected to accelerate across oil and non-oil sectors in most GCC members. However, non-oil growth is expected to be especially vibrant in Saudi Arabia and the UAE.
The rating agency anticipates GDP increases to pick up steam in Qatar, Kuwait, and Oman as well, with Bahrain representing the sole exception where output is seen growing at a more tempered rate versus 2023.
Interest rates are expected to remain high but fall by 1 percent by the end of the year in step with the US Federal Reserve.
“Inflation will remain close to target and contained by price administration measures,” according to the report.
Banking trends
The economic environment is expected to support ongoing credit demand, though growth may slow slightly from a high base last year as banks increase caution.
While profitability will be maintained, margins likely face pressure later in 2024 as interest and funding costs rise. Asset quality looks fairly robust given high provisioning levels, but costs will remain elevated, especially for entities reliant on government cash flows.
Capital levels will further bolster creditworthiness across GCC states except Saudi Arabia, where faster growth may narrow buffers slightly. Liquidity could become strained where external leverage or lower deposit gathering hampers credit expansion.
Oil prices stabilise
S&P Global Ratings also expects oil prices to experience relative stability throughout the year, which will help sustain fiscal spending among oil-producing nations. While ongoing geopolitical conflicts present a threat to this outlook, demand could face pressure if China’s economic expansion slows more than expected. Such a scenario could drive oil prices lower, dampening optimism and potentially straining public finances for countries that require higher prices to balance their budgets.
Risks to 2024 outlook
The key risks to the outlook include worsening geopolitical tensions, exposure to higher-risk jurisdictions including Egypt and Turkey, oil price volatility and real estate exposure.
Risks to GCC banks from Turkey and Egypt appear moderate at the system level given contained exposures totalling $160 billion, though individual banks’ expansions into both markets introduce material country-specific risks as geopolitical uncertainties linger.
Mortgage penetration in the region remains low overall, but a price correction for residential real estate in Dubai combined with high commercial vacancies could slow credit expansion and weaken asset quality as real estate exposures make up sizable portions of Stage 2 and 3 loans at numerous banks. The property sector weathered significant stress during the pandemic but faces renewed headwinds that threaten further loan deterioration should values continue tapering off in Dubai or elsewhere in the GCC.
