Stable, if lacking excitement: the outlook for Gulf banks

Bank Muscat

Are you optimistic or pessimistic about the prospects for Gulf banks in 2025? 

Personally, I’m optimistic, although I don’t expect much excitement from them in the year ahead. And as always, I’m very conscious that any oil price shock on the downside will quickly lead to tightening liquidity and an increase in non-performing loans. 

But first, the optimism. GCC banks are well capitalised, have low cost-to-income ratios, and in recent years have been generating healthy profits. There are very few commercial banks that are struggling and none of them are big players. 

Gulf banks have not suffered as a result of the regionalisation of the Gaza war and their financial efficiency has enabled them to maintain earnings in the face of falling international interest rates. 

Overseas operations have caused losses for some institutions in recent years: currency devaluation in Egypt, financial crisis and hyperinflation in Lebanon and economic difficulties and high levels of inflation in Turkey all had to be reflected in the profit and loss statements of banks that are active in those countries.

However among the larger banks the financial write-downs were easily digested within full earnings statements. More importantly, as we look ahead, the economies of Egypt and Turkey appear to have stabilised and after more than five years of economic depression in Lebanon, the scope for further losses is small. 

Most GCC governments can either balance their budgets or run small, manageable deficits

Oil prices during the whole of 2024 were similar to those in 2023: West Texas Intermediate averaged $75.9 per barrel in the year to December 19, 2024, compared to $77.6 per barrel for the whole of 2023, according to Nicosia-based Middle East Economic Survey.

At that level, most GCC governments can either balance their budgets or run small, manageable deficits. (Bahrain is the exception, needing a price of well over $100 per barrel to balance its budget.)

As a result, GCC finance ministries are going into 2025 in good shape. In December, oil ministers of the Opec+ group – which accounts for about 40 percent of global oil supply – agreed to extend their cutbacks in production until the spring in the hope of supporting current price levels. 

The OECD is predicting that global economic growth will remain around 3.3 percent for the next two years although growth in some major oil importing countries, most notably China, may slow. 

None of the three big international credit rating agencies – Fitch, Moody’s and S&P – has a negative outlook on any of its ratings of GCC governments. Fitch and Moody’s have positive outlooks on Oman, and S&P is positive on Saudi Arabia. All other outlooks are stable. 

Of course, there is always the possibility of unexpected events. We can expect Trump’s White House to be more belligerent towards Iran, but an increase in regional tension can have a positive effect on financial liquidity and bank profits as a result of spiking oil prices.

Political events can also lead to abrupt volatility in individual countries’ oil and gas exports – as we are seeing in Libya – but again, when the events themselves are contained within borders, their economic effects can be positive for governments and banks as a result of higher oil prices. 

So GCC banks are strong and stable, but will there be any excitement during 2025? Will we see any of the big GCC banks breaking out of the region to become global players? 

In December last year Fitch issued a research report that identified four “Flagship Banks” in the GCC: Bank Muscat, First Abu Dhabi Bank (FAB), National Bank of Kuwait and Qatar National Bank (QNB).

All of these command at least 25 percent of their local market, have strong government links, including ownership by the government or ruling family, and a stable financial profile. Fitch also gave honourable mentions to three other banks, which display some flagship characteristics: Emirates NBD, Kuwait Finance House and Saudi National Bank.

 But only two of these banks feature in S&P’s list of the biggest banks in the world, ranked by assets. QNB was ranked 95th with assets of $324 billion at the end of 2023 and FAB was ranked 100th, with $302 billion.

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Within the GCC, we see increasing concentration, with the large banks accounting for a significant proportion of domestic activity. In Bahrain, Kuwait, Saudi Arabia and the UAE, two banks account for at least half of aggregate shareholders’ equity of all commercial banks in those countries. QNB alone has half the Qatari market and Bank Muscat about 40 percent. 

Beyond their home markets, many of these banks have medium sized presences in Egypt and Turkey, but political problems elsewhere are constraining their ability to build regional operations beyond those two big economies. 

Looking beyond the region, the presence of GCC banks is small. Only nine GCC banks have a presence in London and their footprint in the US is even smaller. 

There is some logic to this hesitancy. With such great opportunities in Saudi Arabia and the UAE, does it make sense to submit to the intricate regulatory scrutiny and vast burden of compliance needed to maintain a presence in London and New York?

So my expectation is that we will see more domestic consolidation in 2025, perhaps including mergers between Kuwaiti banks and between large Bahraini domestic banks, leading to greater concentration within GCC banking. This will give the larger GCC banks more ability to participate in financing their own governments’ mega projects and “Visions”. 

GCC banks will remain strong and profitable, eminently capable of serving their home markets, but it will be some time before we see a GCC bank competing with global banks as truly international financial institutions.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems.