We expect a minor decline in profitability in 2025 because if the Fed decides to begin reducing rates in December 2024, most GCC central banks are likely to follow suit to maintain their currency pegs. However, we think several factors will lessen the overall impact,” the statement continued.
Furthermore, according to S&P, the profitability of the banks in the area is reduced by an average of roughly 9% for each 100 basis point decrease in interest rates.
This is predicated on the December 2023 disclosures from the GCC banks and assumes a fixed balance sheet and a parallel shift in the yield curve.
The statement added that lower rates should also help offset the unrealized losses GCC banks have racked up over the last few years.
For the GCC banks we rate, we estimate these losses at around $2.8 billion, or 1.9 percent on average of their total equity,” the report added.
Furthermore, S&P indicated that the Fed will not lower rates until it observes multiple consecutive readings of month-over-month core inflation slowing. This suggests that the first rate cut will probably occur in December, several months later than the agency had predicted.
Additionally, the credit rating agency persisted in its prediction that GCC banks’ profitability would decrease in 2025 as interest rates drop.
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