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Turkey, Egypt, and India, with larger populations and smaller banking systems compared to the Gulf States, offer significant growth potential for the banking sector.
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The main exposure of Gulf banks outside the region is through their banks or subsidiaries in Turkey and Egypt, where they hold assets estimated at about $150 billion as of the end of the first quarter of 2024.
Fitch Ratings Agency has reported that Gulf banks are keen to expand their presence in key regional markets, particularly in Turkey, Egypt, and India. This drive is attributed to improved economic conditions and enhanced growth opportunities in these countries, according to Al Qabas newspaper.
Fitch said in a recent report, “The majority of Gulf banks are planning to acquire lenders in Turkey, Egypt, and India. We believe that expanding into foreign markets forms part of the strategy for some Gulf banks to diversify their business models and maximize their profits.”
The report added, “By deploying their capital in high-growth markets, some Gulf banks may offset weaker growth in their local markets. Turkey, Egypt, and India each have populations much larger than the Gulf states and offer greater potential for banking sector growth due to strong real GDP growth prospects and smaller banking systems relative to their economies.
The main exposure of Gulf banks outside the region is through their banks or subsidiaries in Turkey and Egypt, where they hold assets estimated at about $150 billion as of the end of the first quarter of the current year.
Egypt, Turkey primary focus for some Gulf banks
Fitch continued, “While the Egyptian and Turkish markets remain the primary focus for some Gulf banks, there is growing interest in the Indian market, particularly from UAE banks that have strong and expanding financial and commercial ties with India.”
The report confirmed that the investment appetite of Gulf banks has increased for expansion in Turkey due to changes in its macroeconomic policy, the reduction of external financing pressures, and decreased risks to financial stability. This shift prompted the agency to revise its expectations for the Turkish banking sector positively.
The agency had projected that Turkey’s inflation rate would decrease to an average of 23% by 2025, down from 65% in 2023. It also suggested that Gulf banks might stop using hyperinflation reports for their branches in Turkey starting in 2027.
Gulf banks boost focus on Egyptian market
Fitch indicated a growing interest among Gulf banks in the Egyptian market, attributing this to improvements in Egypt’s macroeconomic environment, opportunities from the privatization program, and the expansion of some Gulf companies in Egypt.
The agency expects a significant improvement in the net foreign assets of the banking sector this year, supported by portfolio flows, remittances from Egyptians abroad, and tourism revenues.
Fitch also suggested that inflation in Egypt will decline to 12.3% by June 2025, down from 27.5% in June of this year, which is anticipated to lead to a reduction in interest rates starting in the fourth quarter of the current year.
Fitch recently revised its outlook for Egyptian banks to positive, reflecting expectations of improved overall stability. This optimism is attributed to the largest foreign direct investment deal Egypt has concluded with the UAE, the value of the loan agreement with the International Monetary Fund increasing to $8 billion, as well as greater foreign exchange rate flexibility and a stronger commitment to structural reforms.
Potential acquisitions
While the rating agency confirmed that the Egyptian banking sector faces some barriers to the entry of Gulf banks, it indicated that banks from the region may have opportunities to acquire shares in three Egyptian banks through the privatization program currently being implemented by Egyptian authorities.
The expansion of Gulf companies in Egypt, particularly Emirati firms, could also support an increased presence of Gulf banks in the country.
Four key drivers behind Gulf banks’ expansion
According to the Fitch report, several factors are driving Gulf banks to expand internationally. These include diversifying their markets, improving profitability, compensating for weak growth in their local markets, and enhancing future prospects for major regional economies.
