According to a recent report by Fitch Ratings, interest rate cuts will hurt GCC (Gulf) banks, with the UAE banks probably being the most affected because interest-earning assets (IEAs) are expected to be repriced more quickly than interest-bearing liabilities.
Saudi Arabian banks are probably going to be less badly hit by the interest rate reductions between Q4 2024 and Q2 2026, even though the majority of GCC banks are probably going to see a decline in earnings. This is because a larger percentage of their financing is likely to be fixed-rate.
Reduced reliance on current and savings account deposits (53.3% of customer deposits at the end of H1 2024 compared to 61.2% at the end of 2019) and higher exposure to fixed-rate, long-duration mortgages (23.3% of total financing at the end of H1 2024 compared to 12.8% at the end of 2019) will also be advantageous to Saudi banks.
Fitch claims that a large percentage of low-cost current and savings account deposits, along with assets that reprice more quickly than liabilities, indicate that the majority of GCC banks are prepared for rising rates.
“We estimate that the short-term positive repricing gap for GCC banks (excluding Kuwaiti banks) represented 6.6% of total assets at end-2023, with about 60% of IEA repricing within 12 months. This has underpinned the strong recovery in banking performance since rates started rising in 2022. However, earnings will be negatively affected as the rate cycle turns.” Fitch said, as reported by Zawya.
The ratings agency projects that by June 2026, the United States Federal Reserve will have lowered interest rates by a total of 200 basis points (bp). Most GCC central banks are expected to follow suit because of exchange-rate pegs.
Kuwait would have the highest average net interest margin (NIM) sensitivity to a 100bp rate cut, followed by the United Arab Emirates, Qatar, and Oman, according to Fitch’s analysis of 46 GCC banks.