RIYADH: Gulf Cooperation Council banks are looking to diversify their business models and boost profitability by entering high-growth markets such as Turkey, Egypt and India, a new report shows.
Fitch Ratings noted that the increase in interest was due to favorable economic conditions and attractive growth opportunities in these countries.
Notably, appetite for expansion in Turkey has increased following macroeconomic policy shifts, while interest in Egypt is fueled by increased stability and privatization opportunities.
Despite higher acquisition costs in these regions, the report said GCC banks remain focused on tapping the potential of these markets to offset slower growth in the country.
According to a June McKinsey report, the GCC banking sector has consistently delivered high returns on equity and impressive valuation ratios by global standards.
The strategic diversification of the GCC economies beyond oil, combined with a sound regulatory framework, has strengthened the stability and profitability of the banking sector.
Higher interest rates further boosted banks' profits, boosting their profitability. The region's banks have outperformed the global average for return on equity, or ROE, over the past decade, maintaining a lead of three to four percentage points through 2022-23.
Although global banking valuations are historically low, GCC banks continue to create value with ROEs that exceed their cost of equity.
Despite record profits driven by higher interest rates for banks globally and in the GCC, McKinsey cautions executives to balance short-term gains with long-term strategic goals.
Investing in transformative change and efficiency is essential to sustaining a competitive advantage when interest rates eventually decline.
According to Fitch Ratings, GCC banks' main exposures outside their home region were concentrated in Turkey and Egypt, where they together held about $150 billion in assets by the end of the first quarter of 2024.
This significant presence underlines the strategic importance of these markets to the growth ambitions of GCC banks.
In addition, there is growing interest in India, particularly from UAE banks, driven by strong and expanding financial and trade ties between the two countries.
Turkey, Egypt and India boast much larger populations compared to the Gulf countries, presenting greater potential for banking sector growth due to robust real GDP growth prospects and relatively smaller banking systems.
For example, the ratio of banking system assets to GDP in these countries is below 100 percent, while the ratio exceeds 200 percent in the largest GCC markets, the report said.
In addition, private credit-to-GDP ratios in 2023 were notably lower at 27 percent in Egypt, 43 percent in Turkey, and 60 percent in India, highlighting the significant scope for expansion in these banking sectors.
According to Fitch, GCC banks are increasingly looking to expand in Turkey due to favorable shifts in the country's macroeconomic policies following last year's presidential election.
These changes have reduced external financing pressures and improved macroeconomic and financial stability, prompting Fitch to upgrade its outlook for the Turkish banking sector to “improve”.
Fitch forecasts inflation in Turkey to fall from 65 percent in 2023 to an average of 23 percent in 2025, and GCC banks are expected to stop using hyperinflation reporting for their Turkish subsidiaries by 2027.
The increased stability of the Turkish lira is likely to boost the profits of GCC banks' operations in Turkey.
At the same time, GCC banks are showing increasing interest in Egypt, driven by the improving macroeconomic environment, the opportunities of the authorities' privatization program and the expansion of GCC corporations in the country.
Fitch recently upgraded its operating environment outlook for Egyptian banks to positive, expecting greater macroeconomic stability.
This improvement is attributed to Egypt's significant foreign direct investment deal with the UAE, a strengthened agreement with the International Monetary Fund, increased exchange rate flexibility and greater commitment to structural reforms.
Fitch expects the Egyptian banking sector's net foreign asset position to improve significantly this year, supported by strong portfolio inflows, remittances and tourism receipts.
Inflation in Egypt is projected to decrease from 27.5 percent in June 2024 to 12.3 percent in June 2025, which could lead to lower interest rates starting in the fourth quarter of 2024.
Fitch noted that while the Egyptian banking market presents high barriers to entry, GCC banks may find opportunities to acquire stakes in the three banks through the authorities' privatization program.
The expansion of GCC companies, especially from the UAE, could also help increase the presence of GCC banks in Egypt.
However, the rising cost of bank acquisitions in Turkey, Egypt and India could pose a challenge to GCC bank acquisition plans.
The cost-to-balance ratio increased, particularly in Turkey and India, reflecting better macroeconomic prospects and reduced operational risks. Acquisitions in these low-rated markets could potentially weaken GCC banks' viability ratings, depending on the size of the acquired entity and the resulting financial profile.
However, the long-term issuer default ratings of almost all GCC banks are supported by government support and are unlikely to be affected by these acquisitions. In this context, economic forecasts play a crucial role in shaping these expansion strategies.
The World Bank updated its April growth forecasts for various countries, reflecting significant opportunities and risks.
For example, Saudi Arabia's economic growth forecast for 2025 has been raised to 5.9 percent from a previous estimate of 4.2 percent, indicating good long-term prospects.
For the UAE, it now stands at 3.9 percent in 2024 from 3.7 percent, rising further to 4.1 percent in 2025.
Kuwait and Bahrain are also expected to see modest increases in growth, while Qatar's forecast for 2024 was cut to 2.1 percent, but revised upward to 3.2 percent in 2025.
