RIYADH: A new report reveals that the Gulf Cooperation Council Bank aims to diversify its business model and increase profitability by entering high-growth markets such as Turkey, Egypt and India.
Fitch Ratings said the increased interest was due to favorable economic conditions and attractive growth opportunities in these countries.
It is noteworthy that the appetite for expansion in Turkey has increased in line with changes in macroeconomic policy, while interest in Egypt has been stimulated by increased stability and privatization opportunities.
Despite higher acquisition costs in these regions, the report says GCC banks remain focused on tapping into the potential of these markets to offset slower domestic growth.
A June McKinsey report found that the GCC banking sector delivers consistently high returns on equity and impressive valuations compared to global standards.
Strategic diversification of GCC economies beyond oil, coupled with a prudent regulatory framework, will help strengthen the stability and profitability of the banking system.
Higher interest rates have driven up profits for banks and thus increased returns. Over the past decade, banks in the region have outperformed the global average in terms of return on equity (ROE), maintaining a three to four percentage point advantage between 2022 and 2023.
Despite global bank valuations at record lows, GCC banks continue to generate value, with ROE exceeding cost of equity.
While record profits are a result of higher interest rates at banks around the world and in the GCC, McKinsey cautions executives to balance short-term profits with long-term strategic goals.
Investing in transformative change and efficiency is essential to maintain competitive advantage when interest rates eventually fall.
GCC banks' main exposure outside their home region is concentrated in Turkey and Egypt, which together had around $150 billion in assets at the end of the first quarter of 2024, according to Fitch Ratings.
This significant presence underlines the strategic importance of these markets for GCC banks’ growth ambitions.
There has also been growing interest in India, particularly from banks in the UAE, driven by the strong and expanding financial and trade ties between the two countries.
Turkey, Egypt and India have significantly larger populations than their GCC peers and offer greater potential for banking growth, given their high real GDP growth potential and comparatively smaller banking systems.
For example, the ratio of banking system assets to GDP in these countries is below 100 percent, while in the largest GCC markets, the ratio is over 200 percent, according to the report.
In addition, private sector credit-to-GDP ratios are set to decline significantly in 2023, at 27 percent in Egypt, 43 percent in Turkey and 60 percent in India, highlighting the huge growth gap in these banking sectors.
GCC banks are increasingly looking for expansion opportunities in Turkey due to positive changes in the country's macroeconomic policies following last year's presidential elections, according to Fitch.
These changes eased external financial pressures and improved macroeconomic and financial stability, leading Fitch to upgrade the outlook for Turkey's banking sector to 'better'.
Fitch projects Turkey's inflation rate to fall from 65 percent in 2023 to an average of 23 percent in 2025, with GCC banks expected to phase out hyperinflation reporting for their Turkish subsidiaries by 2027.
The increasing stability of the Turkish lira is likely to support the performance of GCC banks in Turkey.
At the same time, GCC banks are showing increasing interest in Egypt, driven by the improving macroeconomic environment, opportunities from the government’s privatization program and the expansion of GCC companies in the country.
Fitch recently revised the Outlook on Egypt's banks' operating environment to positive, citing improved macroeconomic stability.
The improvement comes on the back of Egypt's landmark foreign direct investment agreement with the United Arab Emirates, a stronger agreement with the International Monetary Fund, 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 portfolio inflows, remittances and tourism receipts.
Egypt's inflation rate is forecast to ease from 27.5 percent in June 2024 to 12.3 percent in June 2025, potentially leading to a policy rate cut starting in the fourth quarter of 2024.
Fitch noted that despite the high barriers to entry in Egypt's banking market, GCC banks may find opportunities to acquire stakes in three banks through the government's privatization program.
The expansion of GCC companies, particularly from the UAE, could also push GCC banks to increase their operations in Egypt.
However, rising costs of acquiring banks in Turkey, Egypt and India could pose challenges for GCC bank acquisition plans.
Price-to-book ratios have increased, particularly in Turkey and India, reflecting improved macroeconomic outlooks and reduced operational risk. Acquisitions in these lower-rated markets could lower GCC banks' survival ratings, depending on the size of the acquired entity and the resulting financial profile.
However, the long-term issuer credit ratings of almost all GCC banks are sovereign-backed and are unlikely to be affected by these acquisitions. In this context, economic forecasts play a key role in determining these growth strategies.
The World Bank has revised up its growth forecasts for April for countries, reflecting key opportunities and risks.
For example, Saudi Arabia's economic growth forecast for 2025 has been revised up to 5.9 percent from a previous estimate of 4.2 percent, signaling a stable long-term outlook.
For the United Arab Emirates, it is now 3.9 percent in 2024, up from 3.7 percent, and will rise further to 4.1 percent in 2025.
Kuwait and Bahrain are expected to see slightly better growth, while Qatar's 2024 forecast was cut to 2.1 percent but revised up to 3.2 percent for 2025.
