Fitch Ratings anticipates that the phased interest rate cuts expected from the fourth quarter of 2024 will negatively impact the earnings of most GCC banks. This is due to the faster repricing of interest-earning assets (IEAs) compared to interest-bearing liabilities.

However, Fitch analysts believe that GCC interest rates will remain relatively restrictive, and rate cuts are unlikely to be substantial enough to affect banks' viability ratings. The primary risk to viability ratings could be lower-than-expected oil prices, which could tighten liquidity and weaken economic conditions in the region, according to Fitch.

Last month, the US Fed made a significant move by cutting interest rates for the first time in four years, reducing the Fed funds target by 50 basis points (bps) to 4.75–5.0 per cent. This dovish action marks the end of the 'higher-for-longer' era of interest rates and the start of a new monetary easing cycle that could extend beyond 2025.

JPMorgan Research predicts that the Fed will further cut rates by another 50 bps at its next meeting in early November, differing from the Fed's 'dot plot' projections, which indicate two additional 25 bp cuts this year.

Fitch expects the Fed to reduce US interest rates by a cumulative 200bp by June 2026, and most GCC central banks are likely to follow suit due to exchange-rate pegs. UAE banks are expected to be the most affected, while Saudi banks are likely to be less impacted due to their higher proportion of fixed-rate financing.

Most GCC banks are structured to benefit from rising rates, with assets repricing faster than liabilities and a high proportion of low-cost current and savings account deposits. However, as the rate cycle turns, earnings will be negatively affected.

Saudi and UAE banks experienced average net interest margin (NIM) declines of 50bp and 60bp, respectively, during the last monetary easing cycle in 2019-2021. Saudi banks will be less affected this time due to lower reliance on current and savings account deposits and greater exposure to fixed-rate long-duration mortgages.

In the UAE and Bahrain, over 60% of banks' IEAs are set to reprice within 12 months, compared to 44% and 52% in Saudi Arabia and Oman, respectively, where there are higher proportions of fixed-rate retail exposures.

Fitch's analysis of 46 GCC banks' sensitivity suggests that average NIM sensitivity to a 100bp rate cut is highest in Kuwait, followed by the UAE, Qatar, and Oman.