Dubai: Profitability of GCC banks is expected to improve steadily on the back of better asset yields resulting from higher interest rates, but borrowers will face higher cost of funds, adversely impacting their margins.

According to rating agency Moody’s, higher interest rates will be broadly supportive of banks’ net interest margins, particularly in regions where low-cost demand deposits are high and loan re-pricing undertaken in previous quarters will ease pressure on margins as the benefits start to outweigh the higher cost of deposits and other funding.

Credit growth is projected to recover as government spending boost economic activity and spur private-sector growth. Lending growth in 2019 is projected to range from 4 per cent in Saudi Arabia to 6 per cent to 7 per cent in Kuwait, Oman and Bahrain.

On the funding side, most GCC banks are unlikely to face cost pressures from the rate hikes as most banking systems are sufficiently liquid and have loan growth rates in mid-single digits.

Moody’s said funding pressures on banks have reduced and are expected to remain stable next year. Current oil prices and continued international debt issuances by GCC sovereigns have reversed public-sector deposit outflows. Aggregate deposits from the public sector make up around 30 per cent of total deposits.