GCC Islamic banks are benefitting from high oil prices, Moody’s Investors Service said and noted their net profitability will exceed that of conventional peers over the next 12 to 18 months.
A reversal in the tightening monetary policy from the US Federal Reserve through the US dollar peg with GCC countries’ domestic currencies is not expected before the end of next year.
This will continue to help net profit margin preservation for GCC Islamic banks.
“We expect GCC Islamic banks to retain a net profit margin advantage over conventional banks in 2024 although this is converging, particularly in Saudi Arabia. The return on assets of GCC Islamic banks will remain solid because loss provisioning will remain in check,” Moody’s said.
Governments' continued backing and promotion of the Islamic finance industry, growing demand for Shariah-compliant products across the GCC region and ample funding will continue to drive faster growth for Islamic banking assets than conventional peers. Saudi Arabia will retain its leadership in term of market penetration but potential for growth elsewhere remains high.
Consolidation continues to present growth opportunities, it said.
Solid economic conditions will preserve the performance of Islamic financing despite global uncertainty.
The focus on retail financing by the GCC Islamic banks will continue to support asset quality, Moody’s said.
Moderate inflation levels across the region when compared to the rest of the world will also mitigate asset risks.
They will continue to maintain strong capital and liquidity buffers, enabling them to capitalise on the demand for Shariah-compliant financial services across the region.
Economic growth across member states of the Gulf Co-operation Council (GCC) countries will remain strong over the next 12 to 18 months, on the back of supportive oil prices and because ambitious economic diversification agendas will shield the non-oil space where banks conduct the bulk of their lending.
Despite oil production cuts, GCC countries — where a significant part of the government revenue is derived from oil production — will continue to enjoy substantial accumulated financial buffers and fiscal firepower to contain inflation below levels of advanced economies.
Tight financial conditions across the globe will continue to dampen global economic growth during the rest of 2023 and keep economic expansion below trend in 2024, Moody’s noted.
Recession risk in the US has receded, however below-trend output is yet to materialise for inflation to sustainably decline to Federal Reserve's target, while China’s economy is facing considerable growth challenges.
Inflation is easing as expected and will continue to recede over the next year, but risks remain. Consumer prices will continue to moderate across advanced and emerging market economies where reasonably sound macroeconomic management, together with central bank policy credibility, has kept inflation expectations in check.
However, risks to the inflation outlook from commodity price spikes and exceptionally resilient demand persist, Moody’s noted.
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