Margins in Qatar’s banking industry are expected to decline "modestly" in view of (an expected) lower rate regime, even as asset quality would get boost, according to Standard and Poor's (S&P), a global credit rating agency.

Stabilising external debt, a related increase in funding costs from typically more expensive domestic sources, and interest rate cuts will crimp the margins by about 10-20 basis points or bps by the end of 2025, S&P said in a latest report.

At the same time, oversupply in the real estate sector because of the World Cup will likely ease with lower rates, it said, adding this, in turn, would reduce banks’ cost of risk.

Lower rates will reduce the net interest income of banks in selected emerging markets in Europe, the Middle East, and Africa (EMEA), it said, adding yet higher lending growth, improving asset quality, a lower cost of risk, or higher reliance on local funding sources will protect banks' bottom lines.

Despite lower rates, "we expect credit growth to decelerate to an average of 5% in 2025 compared with an average of 8% in 2019-22, as the completion of many infrastructure projects means lower funding needs," the rating agency said.

Expecting monetary easing to continue, albeit only gradually; it said the risk of the US Federal Reserve's easing bias being disrupted has increased due to ongoing consumer resiliency, excess inflation in the system, and uncertainty about expectations.

"The incoming US administration’s likely introduction of trade tariffs and immigration curbs could increase inflation in the US," the report said.

After the Fed decreased rates by 100 bps in 2024, it could afford to slow the pace of rate cuts in the months ahead.

"We now expect the Fed to reduce rates by 75 bps in 2025, which is less than we previously anticipated," S&P said.

Anticipating that the European Central Bank (ECB) will cut rates more quickly than expected due to persistently weak confidence and better visibility on disinflation; it said "we now project that the main policy rate will reach 2.5% before the summer of 2025, before our previous expectation of September 2025."

Lower rates are likely to have a differentiated effect on selected emerging markets in EMEA, depending on the structure of their banking systems’ balance sheets, the correlation between their monetary policies and those of developed markets, and their dependence on external debt.

Banking systems that depend more on external funding - such as those in Turkiye, Qatar, and, to a much lesser but increasing extent, Saudi Arabia - will benefit from the lower rates and higher global liquidity as this will make funding cheaper, according to the rating agency.

The key factors to watch are management reactions, balance-sheet repositioning, and shifting global narratives about monetary easing resulting in fewer interest rate cuts, S&P said.