Stock - Bank / Banking
UAE and Gulf banks nailed record financials during the course of 2023. More or less similar conditions will prevail in 2024. Image Credit: Shutterstock

We had in the recent past referred to the potential for outstanding performances by GCC banks for 2023, which was more than confirmed when they turned in their final numbers for the year. The profits of many of these banks increased by substantial percentages, of 30-40 per cent, and so too did dividends that exceeded expectations. It lead to a similar rise in their share prices.

As a result, shareholders will receive rewarding returns upon maturity dates, slated from March. In addition to the high interest rates, which played a key role in increasing profits, the GCC banks also benefited from the strong performance of these economies, where growth rate of non-oil sectors rising by between 4-5 per cent, fuelling heightened demand for bank credit. Despite the high interest rates…

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The current interest rates are inconsistent with the economic conditions in the GCC, due to the relatively low inflation rates. Nonetheless, the linkage of Gulf currencies to the US dollar, despite its advantages, does not allow another alternative in this regard.

This has led to high lending costs, causing some difficulties for companies across sectors, particularly in real estate, logistics and transportation, which have suffered from the dual effect of soaring fuel prices and high lending costs at the same time.

Rate cuts? Not immediately

What about interest rates in 2024? Many of the economic activities will depend on interest rates, including the performance of banks and the level of stock prices on Gulf exchanges. There are expectations about lowering interest rates happening sometime this year.

But the recent data issued by the US Federal Reserve and the European Central Bank indicate that expectations about the possibility of low inflation rates are exaggerated, which will lead to more waiting on interest rate cuts, although they will eventually be reduced this year. However, these cuts will be lower than previous expectations, meaning the high rate scenario prevails.

GCC banks and banks elsewhere will go through another ‘spring’, achieving good performances comparable to last year's or a little lower. It means investments in the banking sector will be one of the best areas to do so this year as well, with dividends too likely to be close to those in 2023.

This situation has given the GCC banks a privileged position among financial institutions in developed and emerging markets alike, as they have benefited from economic expansion driven by increased spending resulting from high oil revenues.

Such opportunities are not available in other countries whose non-oil economic sectors are growing at modest rates, some of which do not even surpass 1 per cent in developed economies.

A chance for banking merger plays?

This prompted the Standard & Poor's rating agency to say: “The banking sector in the GCC nations, particularly in the UAE and Saudi Arabia, will see another bright spot and credit and profitability will continue to be strong in 2024, although there is a possibility of a slight decline from 2023 levels", mainly due to the likelihood of lower interest rates.

Meantime, the Gulf banking sector is expected to witness mergers in some countries, which will strengthen the position of some and raise their financing capabilities and performance in general. And give them more distinctive advantages compared to banks in other countries. In turn, make the shares of these listed banks more attractive to local and foreign investors.

Non-oil economic sectors will have to cope with another year of high interest rates, and respond by restructuring some activities and reducing operating costs, which will qualify them for a better position in 2024.