The Fitch Ratings expects that the interest rate cut in the fourth quarter of this year will be a negative factor on most Gulf banks’ profits, due to the re-pricing of interest-bearing assets faster than interest-bearing liabilities at rates that were lower.
Consequently, The US Federal Reserve pointing to its previous expectations that will cut interest rates by an additional 2% until June 2026, with most Gulf central banks likely to follow the Fed with similar interest rate cuts due to their currencies being pegged to the dollar.
Basket of Currencies
Furthermore, Fitch Ratings expected in their report that the Emirati banks would be the most affected in the Gulf due to reduction in interest rates, in the fourth quarter of 2024.
Whereas, the Saudi banks would be less affected than the Emirati banks due to their higher share of financing at a fixed interest rate, indicating that the impact of the reduction in interest rates on the region’s banks would depend on the level of personal loans for each bank.
The sensitivity of net profit margins to interest in Kuwaiti banks usually shows a higher negative impact from interest rate cuts. The agency said further that the measures taken by the Central Bank of Kuwait may reduce the negative impact of interest rate cuts on net profit margins.
Fitch Ratings also mentioned that they expect Kuwaiti banks to record a lower negative impact from interest rate cuts compared to other Gulf banks, due to the dinar being pegged to an undisclosed currency basket.
Importantly, the agency said that the impact of the interest rate cut in Omani and Qatari banks will be mitigated by asset repricing gaps, while in Bahraini banks the impact on net interest margins will be limited, but more volatile due to the different business models of banks in the Kingdom.
Raise Interest Rates
In regards to raising interest rates, Fitch Ratings said that most Gulf banks are preparing to raise interest rates in the fourth quarter of 2024, with faster asset repricing and a high percentage of current deposits and low-cost savings accounts.
The short-term interest repricing gap for Gulf banks (excluding Kuwaiti banks) is estimated to represent 6.6% of total Gulf banking assets by the end of 2023, with about 60% of interest-bearing assets being repriced within 12 months.
The agency also noted that the strong recovery in the performance of Kuwaiti banks has been supported by interest-bearing assets since their rates began to rise in 2022. But most of them will still see their profits affected as the interest rate cycle turns upward.
Based on the agency’s analysis of banks’ sensitivity to lowering or raising interest rates, they estimate that a 1% reduction in interest rates would provide an increase in net interest profit margins of 0.02% in the Gulf banking sector.
Profit Margin Sensitivity
The credit rating agency’s review of the analyses of 46 Gulf banks indicates that the sensitivity of net interest margins to a 1% cut in interest rates is most affected for Kuwaiti banks, followed by banks in the UAE, Qatar and the Sultanate of Oman, estimating that a 1% cut in interest rates would lead to an erosion of average net interest margins by 0.28% for Kuwaiti banks, 0.17% for UAE banks and 0.07% for Qatari and Omani banks.
Interest in the Gulf is restricted
Fitch Ratings expects that interest rates in the Gulf countries to remain relatively restrained and interest rate cuts are unlikely to be large enough to impact bank ratings.
However, they indicated that the main risk to the region’s banks’ ratings may come from oil prices falling below the agency’s expectations of $70 per barrel in 2025 and $65 per barrel in 2026, which could lead to tighter liquidity and weaker economic conditions in the region if oil prices fall.
