RIYADH: Gulf Cooperation Council banks aim to diversify their business models and increase profitability by entering high-growth markets such as Turkey, Egypt and India, a new report finds.
Fitch Ratings noted that this growing interest is due to favorable economic conditions and attractive growth opportunities in these countries.
In particular, the appetite for expansion in Turkey has increased following changes in macroeconomic policies, while interest in Egypt is fueled by greater stability and privatization opportunities.
Despite higher acquisition costs in these regions, the report says GCC banks remain focused on exploiting the potential of these markets to offset slower growth domestically.
The banking sector in the Gulf Cooperation Council countries has consistently delivered high returns on equity and impressive valuation multiples by global standards, according to a June report by McKinsey.
The strategic diversification of the Gulf Cooperation Council economies beyond oil, combined with prudent regulatory frameworks, has strengthened the stability and profitability of the banking system.
High interest rates have further boosted bank profits, contributing to their returns. Over the past decade, banks in the region have outperformed the global average in terms of return on equity, or ROE, maintaining a three to four percentage point advantage over the 2022-2023 period.
While global bank valuations are historically low, GCC banks continue to generate value, with return on equity exceeding their cost of equity.
Despite record profits driven by high interest rates for banks globally and in the Gulf Cooperation Council, McKinsey advises executives to balance short-term gains with long-term strategic goals.
Investing in transformative change and efficiency is essential to maintaining a competitive edge when interest rates eventually fall.
According to Fitch Ratings, the GCC banks' main exposure outside their home region was concentrated in Turkey and Egypt, where they collectively held around $150 billion in assets by the end of the first quarter of 2024.
This significant presence underlines the strategic importance of these markets for the growth ambitions of the Gulf Cooperation Council banks.
Additionally, there is growing interest in India, especially from UAE-based banks, driven by the strong and growing financial and trade ties between the two countries.
Turkey, Egypt and India each have significantly larger populations than the Gulf Cooperation Council countries, presenting greater growth potential for the banking sector due to their strong real gross domestic product growth prospects and relatively smaller banking systems.
For example, the report says that the ratio of banking system assets to GDP in these countries is less than 100%, while in the largest markets of the Gulf Cooperation Council this ratio exceeds 200%.
Furthermore, private credit-to-GDP ratios were significantly lower in 2023, at 27% in Egypt, 43% in Turkey and 60% in India, highlighting significant room for expansion in these banking sectors.
According to Fitch, Gulf Cooperation Council banks are increasingly aiming to expand in Turkey, due to a favorable shift in the country's macroeconomic policies after last year's presidential elections.
These changes have reduced external financial pressures and improved macroeconomic and financial stability, prompting Fitch to upgrade its outlook for the Turkish banking sector to “improving.”
Fitch forecasts Turkish inflation to fall from 65% in 2023 to an average of 23% in 2025, and Gulf Cooperation Council banks are expected to stop using hyperinflation reporting for their Turkish branches by 2027.
The increased stability of the Turkish lira will likely boost yields on the Turkish operations of Gulf Cooperation Council banks.
At the same time, Gulf Cooperation Council banks are showing increasing interest in Egypt, driven by an improved macroeconomic environment, the opportunities offered by the authorities' privatization program and the expansion of Gulf Cooperation Council companies in the country.
Fitch recently upgraded its outlook for Egyptian banks' operating environment rating to positive, anticipating greater macroeconomic stability.
This improvement is attributed to Egypt's substantial foreign direct investment agreement with the United Arab Emirates, the strengthening of the agreement with the International Monetary Fund, greater exchange rate flexibility and a stronger commitment to structural reforms.
Fitch expects the Egyptian banking sector’s net foreign asset position to improve significantly this year, supported by solid portfolio inflows, remittances and tourism revenues.
Egyptian inflation is expected to decline from 27.5% in June 2024 to 12.3% in June 2025, potentially leading to cuts in official interest rates starting in the fourth quarter of 2024.
Fitch noted that while Egypt's banking market has high barriers to entry, Gulf Cooperation Council banks may find opportunities to acquire stakes in three banks through the authorities' privatization program.
The expansion of GCC companies, particularly those from the UAE, could also foster a greater presence of GCC banks in Egypt.
However, rising bank acquisition costs in Turkey, Egypt and India could pose a challenge to the Gulf Cooperation Council banks' acquisition plans.
Price-to-book ratios have increased, particularly in Turkey and India, reflecting improved macroeconomic prospects and reduced operational risks. Acquisitions in these lower-rated markets could potentially weaken the viability ratings of GCC banks, depending on the size of the acquired entity 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 acquisitions. In this context, economic forecasts play a crucial role in shaping these expansion strategies.
In April, the World Bank updated its growth projections for several countries, highlighting significant opportunities and risks.
For example, Saudi Arabia's economic growth forecast for 2025 has been raised to 5.9% from the previous estimate of 4.2%, demonstrating a strong long-term outlook.
For the UAE it is now 3.9% for 2024, up from 3.7% previously, with a further increase to 4.1% in 2025.
Kuwait and Bahrain are also forecast to post modest growth, while Qatar’s 2024 forecast has been cut to 2.1%, but raised to 3.2% for 2025.
