RIYADH: Gulf Cooperation Council banks are aiming to diversify their business models and improve profitability by entering high-growth markets such as Turkey, Egypt and India, a new report has revealed.
Fitch Ratings noted that this growing interest was due to favorable economic conditions and attractive growth opportunities in these countries.
In particular, appetite for expansion in Turkey has increased following macroeconomic policy changes, while interest in Egypt is fueled by increased stability and privatization opportunities.
Despite higher acquisition costs in these regions, the report says GCC banks remain focused on harnessing the potential of these markets to offset slower growth nationally.
The GCC banking sector has consistently delivered high returns on equity and impressive valuation multiples compared to global standards, according to a June McKinsey report.
The strategic diversification of GCC economies beyond oil, coupled with prudent regulatory frameworks, has supported banking stability and profitability.
The increased interest rates further boosted bank profits, contributing to their profitability. Over the past decade, banks in the region have outperformed the global average in return on equity, or ROE, maintaining a lead of three to four percentage points in 2022-2023.
Although global bank valuations are historically low, GCC banks continue to generate value, with ROE exceeding the cost of equity capital.
Despite record profits driven by high interest rates for banks globally and in the GCC, McKinsey warns executives to balance short-term gains with long-term strategic goals.
Investing in transformative change and efficiency is critical to sustaining a competitive advantage when interest rates eventually fall.
GCC banks' main exposure outside their home region was concentrated in Turkey and Egypt, where they collectively held about $150 billion in assets by the end of the first quarter of 2024, according to Fitch Rating.
This significant presence underlines the strategic importance of these markets to the growth ambitions of GCC banks.
Additionally, there is growing interest in India, particularly from UAE-based banks, driven by the strong and expanding financial and trade ties between the two countries.
Turkey, Egypt and India each boast significantly larger populations compared to the GCC countries, presenting greater potential for banking sector growth due to strong prospects for real gross domestic product growth and comparatively smaller banking systems.
For example, the ratio of banking system assets to GDP in these countries is below 100%, while in the largest GCC markets, this ratio exceeds 200%, according to the report.
In addition, the ratio of private credit to GDP was considerably lower in 2023, standing at 27% in Egypt, 43% in Turkiye and 60% in India, highlighting substantial room for expansion in these banking sectors.
GCC banks are increasingly looking to expand into Turkey due to a favorable shift in the country's macroeconomic policies following last year's presidential election, according to Fitch.
These changes have reduced external funding pressures and improved macroeconomic and financial stability, prompting Fitch to upgrade its outlook for the Turkish banking sector to 'improve'.
Fitch expects inflation in Turkey to fall from 65% in 2023 to an average of 23% in 2025, with GCC banks expected to stop using hyperinflation reporting for their Turkish subsidiaries by 2027.
The increased stability of the Turkish lira is likely to boost returns on GCC banks' Turkish operations.
At the same time, GCC banks are showing increasing interest in Egypt, driven by a better macroeconomic environment, opportunities from the authorities' privatization program and the expansion of GCC corporations in the country.
Fitch recently upgraded its outlook on the operating environment score for Egyptian banks to positive, anticipating greater macroeconomic stability.
This improvement is attributed to Egypt's substantial foreign direct investment agreement with the United Arab Emirates, a strengthened agreement with the International Monetary Fund, increased exchange rate flexibility and a stronger commitment to structural reforms.
Fitch expects the Egyptian banking sector's net external asset position to improve significantly this year, supported by robust portfolio inflows, remittances and receipts from tourism.
Egyptian inflation is expected to decline from 27.5 percent in June 2024 to 12.3 percent in June 2025, which could lead to policy rate cuts 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 three banks through the authorities' privatization program.
The expansion of GCC companies, especially those from the UAE, could also lead to increased presence of GCC banks in Egypt.
However, the rising cost of acquiring banks in Turkey, Egypt and India could pose challenges to GCC bank acquisition plans.
The price-to-book ratio increased, particularly in Turkey and India, reflecting better macroeconomic outlook and reduced operational risks. Acquisitions in these lower-rated markets could 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 supported by government support and are unlikely to be affected by these purchases. In this context, economic forecasts play a crucial role in shaping these expansion strategies.
The World Bank updated its growth forecasts in April for various countries, reflecting significant opportunities and risks.
For example, Saudi Arabia's economic growth forecast for 2025 was raised to 5.9%, up from the previous estimate of 4.2%, signaling solid long-term prospects.
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 post modest increases, while Qatar's forecast for 2024 was cut to 2.1% but revised upwards to 3.2% for 2025.
