Riyadh: A new report shows that GCC banks intend to diversify their business models and increase their profitability by entering high-growth markets such as Turkey, Egypt and India.
Fitch Ratings noted that this growing interest is due to favorable economic conditions and attractive growth opportunities in these countries.
Notably, the desire to expand in Turkey has increased following macroeconomic policy changes, while interest in Egypt has been bolstered by increased stability and privatization opportunities.
Despite higher acquisition costs in these regions, the report says GCC banks remain focused on tapping the potential of these markets to offset slower growth at home.
According to a June McKinsey report, the GCC banking sector has consistently delivered high returns on equity and impressive valuation multiples by global standards.
The strategic diversification of GCC economies beyond oil, combined with prudent regulatory frameworks, has boosted stability and bank profitability.
The increase in the interest rate has further increased bank profits and contributed to their profitability. Over the past decade, the region's banks have outperformed the global average return on equity, or ROE, maintaining a three- to four-percent advantage over 2022-2023.
Although global bank valuations are historically low, GCC banks continue to generate value with ROEs that exceed the cost of equity.
Despite record gains from rising interest rates for banks globally and in the GCC, McKinsey warns managers to balance short-term gains with long-term strategic goals.
Investing in transformational change and efficiency is essential to maintaining a competitive advantage when interest rates eventually decline.
According to Fitch Ratings, GCC banks' primary exposure outside their core region was concentrated in Turkey and Egypt, where they had a combined total of about $150 billion in assets by the end of the first quarter of 2024.
This significant presence emphasizes the strategic importance of these markets for the growth ambitions of GCC banks.
In addition, there is growing interest in India, particularly from UAE-based banks, due to the strong and growing financial and trade ties between the two countries.
Turkey, Egypt and India each have a larger population compared to the countries of the Persian Gulf Cooperation Council, which offer more potential for the growth of the banking sector due to the growth prospects of the real GDP and relatively smaller banking systems.
For example, the ratio of banking system assets to GDP in these countries is less than 100 percent, while according to this report, in the largest markets of the Persian Gulf Cooperation Council, this ratio exceeds 200 percent.
In addition, the ratio of private credit to GDP was significantly lower in 2023, reaching 27 percent in Egypt, 43 percent in Turkey, and 60 percent in India, indicating significant room for development in these banking sectors.
According to Fitch, GCC banks are increasingly looking to expand in Turkey due to a favorable change in the country's macroeconomic policies after last year's presidential election.
These changes have reduced external financial pressures and improved macroeconomic and financial stability, prompting Fitch to upgrade its outlook for Turkey's banking sector to “improve”.
Fitch expects Turkish inflation to moderate from 65 percent in 2023 to an average of 23 percent in 2025, with GCC banks expected to use hyperinflation reporting for their subsidiaries by 2027. Stop Turkey.
Increased stability of the Turkish lira is likely to boost the profitability of GCC banks' Turkish operations.
At the same time, GCC banks are showing increasing interest in Egypt, driven by a better macroeconomic environment, opportunities arising from the authorities' privatization program and the expansion of GCC companies in the country.
Fitch recently upgraded its outlook on Egypt's banks' operating environment score to positive, predicting greater macroeconomic stability.
The improvement is attributed to Egypt's significant foreign direct investment agreement with the United Arab Emirates, a strengthened IMF agreement, increased foreign exchange rate flexibility, and a stronger commitment to structural reforms.
Fitch expects Egypt's banking sector's net foreign asset position to improve significantly this year, supported by strong portfolio inflows, remittances and tourism receipts.
Egypt's inflation is forecast to decrease from 27.5% in June 2024 to 12.3% in June 2025, potentially leading to a reduction in policy interest rates from the fourth quarter of 2024.
While Egypt's banking market has high barriers to entry, GCC banks may find opportunities to acquire stakes in the three banks through the authorities' privatization program, Fitch noted.
The expansion of GCC companies, especially Emirati companies, can increase the presence of GCC banks in Egypt.
However, rising bank acquisition costs in Turkey, Egypt and India may pose challenges to GCC bank acquisition plans.
Price-to-book ratios have increased, particularly in Turkey and India, reflecting a better macroeconomic outlook and reduced operational risks. Acquisitions in these lower-rated markets could potentially weaken the GCC banks' credit ratings, depending on the size of the entity being acquired and the resulting financial profile.
However, almost all GCC banks' long-term issuer default ratings are backed by government support and are unlikely to be affected by these purchases. In this context, economic forecasts play an important role in shaping these development strategies.
The World Bank has updated its April growth forecasts for various countries, reflecting significant opportunities and risks.
For example, Saudi Arabia's economic growth forecast for 2025 has increased to 5.9 percent, up from the previous estimate of 4.2 percent, indicating a strong long-term outlook.
For the UAE it is now 3.9% for 2024, up from 3.7%, with a further increase to 4.1% in 2025.
Kuwait and Bahrain are also expected to experience moderate growth, while Qatar's forecast has dropped to 2.1% for 2024, but increased to 3.2% for 2025.
