S&P Global expects robust profitability for GCC banks amid US Federal Reserve delay in interest rates

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(MENAFN) Standard & Poor’s Global has indicated that the decision by the US Federal Reserve to postpone interest rate cuts bodes well for banks in the Gulf Cooperation Council (GCC) region, forecasting continued robust profitability for the sector in the current year. Despite expectations of prolonged interest rate hikes, the agency anticipates that Gulf banks will maintain strong asset quality, supported by resilient economies, conservative debt levels, and significant precautionary reserve allocations. This optimistic outlook was detailed in a statement obtained by Sky News Arabia.

According to Standard & Poor’s Global, while a marginal decline in profitability is projected for 2025, driven by potential interest rate cuts by the Federal Reserve starting in December 2024, with GCC central banks likely to follow suit to uphold their currency pegs, several mitigating factors are expected to offset the overall impact of these rate adjustments. The agency underscores the resilience of Gulf banks in navigating fluctuations in global interest rates, highlighting their ability to adapt to changing market conditions.

The statement notes that a reduction of 100 basis points in interest rates typically results in an approximate 9 percent decrease in the average net profits of GCC banks, based on disclosures issued by these banks in December 2023. This estimation assumes stability in the banks’ balance sheets and a parallel shift in the yield curve. Despite these potential challenges, S&P Global remains confident in the fundamental strength of Gulf banks, citing their prudent risk management practices and strong capitalization levels as key pillars of resilience in the face of external economic uncertainties.

Overall, the delay in interest rate cuts by the US Federal Reserve is viewed as a positive development for Gulf banks, providing them with continued stability and supporting their profitability outlook in the near term. Standard & Poor’s Global’s analysis underscores the GCC banking sector’s ability to weather external market volatility and underscores the importance of sound risk management practices in navigating evolving macroeconomic conditions.

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