Coverage: Q2 2024 · Information to 30 September 2024
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TGB Quarterly Regional Banking Monitor · 30 September 2024
Gulf central banks followed the Federal Reserve's half-point cut of 18 September 2024 while Egypt held its overnight deposit rate at 27.25%, as UAE bank credit grew 8.0% in the year to June 2024 with the system's capital adequacy ratio at 18.3%.
The desk view
The months after the second quarter of 2024 split the region into two monetary camps. Gulf central banks followed the Federal Reserve's half-point cut of 18 September 2024 on the same day: SAMA, the CBUAE and the CBB each cut by 50bp, while the CBK moved by 25bp to 4.00%. Egypt kept its overnight deposit rate at 27.25% after the 600bp increase and exchange-rate float of March 2024, with July inflation still at 25.7%. Morocco cut by 25bp in June and held in September. Gulf banks enter the easing cycle with capital ratios of 18.3% in the UAE (Q2 2024) and 20.1% in Saudi Arabia (2023). The pressure points are Moroccan asset quality, Egyptian foreign-currency mismatches and credit running ahead of deposits in Saudi Arabia.
The regional picture: pegs follow the Fed, Egypt stays tight
The Federal Reserve lowered the target range for the federal funds rate by half a percentage point to 4.75–5.00% on 18 September 2024. Central banks in Saudi Arabia, the UAE and Bahrain moved the same day. SAMA cut its repo rate by 50bp to 5.50% and its reverse repo rate by 50bp to 5.00%. The CBUAE cut the Base Rate on its Overnight Deposit Facility by 50bp, from 5.40% to 4.90%, effective 19 September. The CBB cut its overnight deposit rate by 50bp, from 6.00% to 5.50%. The CBK cut its discount rate by 25bp, from 4.25% to 4.00%, effective 19 September 2024. The CBJ followed with a 50bp cut on all of its monetary policy instruments as of 22 September 2024, taking its main rate to 7.00%.
The UAE framework makes the transmission explicit: the CBUAE Base Rate is anchored to the Federal Reserve's Interest Rate on Reserve Balances. Kuwait passed through half of the US move with its 25bp step. The CBK presented its cut as support for activity, saying it aims at fostering an environment conducive to sustainable growth through stimulating aggregate demand, with inflation down to 3.00% in July 2024 from 4.71% in April 2022.
North Africa followed its own path. Egypt's central bank raised its overnight deposit, overnight lending and main operation rates by 600bp to 27.25%, 28.25% and 27.75% at a special meeting on 6 March 2024, and committed to letting the exchange rate be determined by market forces. It held those rates on 18 July and 5 September 2024. Bank Al-Maghrib cut its key rate by 25bp to 2.75% on 25 June 2024 after four meetings on hold, and kept it there on 24 September 2024.
Policy-rate cuts announced in September 2024, bp
Source: Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 September 2024), 18 September 2024; Saudi Central Bank (SAMA), SAMA's Decision on Repo and Reverse Repo Rates, 18 September 2024; Central Bank of the UAE (CBUAE), CBUAE Lowers the Base Rate by 50 Basis Points, 18 September 2024; Central Bank of Bahrain (CBB), CBB Cuts Overnight Interest Rate by 50 basis points, 18 September 2024; Central Bank of Jordan (CBJ), The Open Market Operations Committee decides to cut interest rates on the monetary policy instruments by 50 basis points, 22 September 2024; Central Bank of Kuwait (CBK), CBK Cuts Discount Rate by 25 Basis Points to 4.00%, 18 September 2024; Central Bank of the UAE (CBUAE), UAE Monetary, Banking & Financial Markets Developments - 2024 Q2, 31 August 2024; Bank Al-Maghrib, Press release: Nineteenth meeting of the Coordination and Systemic Risk Monitoring Committee, 2 July 2024; International Monetary Fund, Saudi Arabia: 2024 Article IV Consultation-Press Release; and Staff Report (IMF Country Report No. 2024/280), 4 September 2024; International Monetary Fund, Arab Republic of Egypt: Third Review Under the Extended Arrangement Under the Extended Fund Facility (IMF Country Report No. 24/274), 26 August 2024; Central Bank of Bahrain (CBB), Financial Stability Report, March 2024 (Issue No. 36), 31 March 2024; International Monetary Fund, IMF Executive Board Concludes 2023 Article IV Consultation with Qatar (PR24/39), 7 February 2024.
Banking-system indicators are published on different calendars, so the comparisons that follow mix reference dates: UAE data run to June 2024, Jordanian data to the first half of 2024 and Moroccan asset-quality data to May 2024, while Saudi, Egyptian and Bahraini figures refer to 2023 and Qatari figures to the second quarter of 2023.
Saudi Arabia: lending runs ahead of deposits
SAMA's 50bp cuts took the repo rate to 5.50% and the reverse repo rate to 5.00% on 18 September 2024. The IMF's latest Article IV staff report described a sound system: the aggregate regulatory capital ratio was 20.1% and the Tier 1 ratio 18.6% of risk-weighted assets in 2023, and NPLs declined to about 1.5% of total loans. Return on equity was 12.8% in 2023. The IMF's press release on the consultation said the banking sector is on a strong footing, with FSAP stress tests showing banks and non-financial corporates resilient to shocks even under severe adverse scenarios.
Funding is the pressure point. Bank credit growth, mainly to the corporate sector, continues to surpass deposit growth, according to the IMF, which put credit growth at about 11% and expected it to remain at that level during 2024. Customer deposits fell to 96.1% of net loans in 2023 from 115.7% in 2016. In other words, net loans now exceed customer deposits. Demand deposits fell to 53.1% of total deposits in 2023 from 66.0% in 2020, and the IMF noted that the shift towards time and saving deposits increased banks' funding costs.
The link between banks and the state has deepened. Deposits of government-related entities represented 31.5% of total deposits as of Q1 2024, while bank claims on the public sector have been steady at about 17% of total bank assets since 2019. Most IMF Directors supported introducing a positive neutral countercyclical capital buffer. Lower policy rates should ease the cost of the time deposits that now fund a larger share of the balance sheet, but they also remove a brake on loan demand at a time when credit is already outrunning deposits.
United Arab Emirates: deposits outpace credit
Total assets of banks operating in the UAE rose 1.3% on the quarter to AED 4,310.2 billion at the end of June 2024, 11.3% higher than a year earlier. Gross credit rose 2.6% on the quarter to AED 2,100.9 billion, an annual increase of 8.0%. Customer deposits rose 1.3% on the quarter and 13.0% on the year to AED 2,692.5 billion. Resident deposits rose 13.8% and non-resident deposits 5.1% over the year to June 2024. Personal loans to residents grew 4.7% on the quarter and 13.9% on the year to AED 450.7 billion. With deposits growing faster than credit over the year, the system is funding its loan growth comfortably.
UAE banking indicators (Q2 2024 figures are CBUAE estimates)
| Indicator | Q2 2023 | Q1 2024 | Q2 2024 | Change on a year earlier |
|---|---|---|---|---|
| Total assets (AED billion) | 3,873.1 | 4,254.5 | 4,310.2 | 11.3% |
| Gross credit (AED billion) | 1,944.8 | 2,047.0 | 2,100.9 | 8.0% |
| Total deposits (AED billion) | 2,382.1 | 2,657.1 | 2,692.5 | 13.0% |
| Personal loans to residents (AED billion) | 395.8 | 430.6 | 450.7 | 13.9% |
| Capital adequacy ratio | 18.2% | 18.0% | 18.3% | +0.1pp |
| Tier 1 ratio | 17.0% | 16.7% | 17.0% | 0.0pp |
| CET1 ratio | 15.3% | 15.0% | 15.3% | 0.0pp |
The capital adequacy ratio stood at 18.3% at the end of June 2024, well above the minimum requirement of 13%, which includes the 2.5% capital conservation buffer. Over the five quarters to June 2024 the ratio held between 17.9% and 18.5%. The CBUAE's Financial Stability Report for 2023 put the system's return on assets at 2% and its cost-to-income ratio at 31.9%. Its net NPL ratio was 2.4% and total provision coverage 93.8%. The eligible liquid asset ratio was 22% and the loan-to-deposit ratio 79%. The report noted that real GDP grew by 3.6% in 2023, driven by 6.2% growth in the non-oil sector. At bank level, Emirates NBD reported a profit of AED 13.8 billion for the first half of 2024, up 12% year on year, with its net interest margin improving to 3.65% in the second quarter of 2024. Its impaired loan ratio improved to 4.2% after an impairment credit of AED 2.2 billion as clients regularised loan payments. Lending grew 6% in the half to surpass AED 500 billion. IMF staff found in May 2024 that general asset quality had improved, while credit growth was resilient despite higher domestic interest rates. They noted that the central bank intends to restore reserve requirements to the historical level of 14% for demand deposits, and said risks from real-estate activity should be closely monitored with a view to tightening macroprudential policies if needed. The UAE also exited the FATF's enhanced monitoring process in March 2024. Because the Base Rate is tied to the Federal Reserve, these prudential levers matter more for restraining credit as policy rates fall.
Kuwait, Qatar, Bahrain and Oman
Kuwait
The CBK's 25bp cut follows a period of weak lending: growth in credit to the nonfinancial private sector fell to 1.8% in 2023. Bank lending rates had risen in response to gradual policy-rate increases by the CBK. IMF staff said in May 2024 that banks have maintained strong capital and liquidity buffers, that profitability has rebounded from pandemic lows and that non-performing loans remain low and well provisioned for. With inflation at 3.00% in July 2024, the CBK's 25bp step was half the size of the 50bp cuts by SAMA and the CBUAE.
Qatar
The IMF's 2023 Article IV assessment of Qatari banks used data for the second quarter of 2023: a capital adequacy ratio of 19% and a return on equity of 14.6%. The NPL ratio had edged up to 3.8%, with provisioning coverage close to 80%. Nonresident deposits had fallen by more than one-third from their recent peak and were partly replaced by higher public-sector domestic deposits.
Bahrain
The CBB's 50bp cut took its overnight deposit rate to 5.50%. Its Financial Stability Report showed a banking-sector capital adequacy ratio of 19.7% in December 2023. The NPL ratio fell to 2.9% in December 2023 from 3.0% in December 2022, while specific provisions fell to 59.8% of NPLs. Thinner specific provisioning is the soft spot in otherwise improving Bahraini asset quality.
Oman
IMF staff who visited Muscat in May 2024 found bank capital and liquidity ratios and profitability at comfortable levels. Banks' net foreign asset position turned positive in December 2023 for the first time since 2014, reflecting rising investments in foreign securities.
Egypt: from float to disinflation
The CBE's special meeting on 6 March 2024 raised its three key rates by 600bp to 27.25%, 28.25% and 27.75%, building on a 200bp increase in February 2024. By its September meeting, annual headline and core inflation had eased for a fifth consecutive month, to 25.7% and 24.4% in July 2024, from 27.5% and 26.6% in June 2024. Annual food inflation fell to 31.9% in June 2024 from a peak of 73.6% in September 2023. By July, the overnight deposit rate exceeded headline inflation by 1.55 percentage points. The MPC expects inflation to hover around current levels until Q4 2024 and to decline significantly in Q1 2025. It judged that current policy rates remain appropriate to maintain a tight stance until a significant and sustained decline in inflation is realised. The CBE's inflation target is 7% (±2 percentage points) on average in Q4 2024. Real GDP growth softened to 2.2% in Q1 2024 from 2.3% in Q4 2023.
The IMF Executive Board completed the third review of Egypt's Extended Fund Facility on 29 July 2024, allowing a drawing of about US$820 million (SDR 618.1 million), and said foreign-exchange shortages had been eliminated. IMF staff reported that the spread between the official rate and market-clearing rates had stayed closed since early March and that the foreign-exchange demand backlog at banks had remained zero. Commercial banks' net foreign assets strengthened by US$13.3 billion in the third quarter of FY2023/24.
At end-December 2023, the system's regulatory capital ratio was 18.6% and NPLs were 3.0% of total loans. Loan provisions covered 88.7% of NPLs and return on average equity was 17.7%. Loans rose to 54.0% of deposits from 48.9% at end-March 2023. The IMF flagged that foreign-currency loans, particularly to public-sector entities, are not fully matched by foreign-currency deposits. Under the programme, the CBE is to complete stress tests of the banking sector and share detailed results with IMF staff by end-September 2024, using end-March 2024 data. A currency-mismatch exposure of this kind matters most if the exchange rate weakens again, which is why the stress-test results are the next test of the March reforms.
Morocco and Jordan
Morocco
Bank Al-Maghrib's September projections put headline inflation at 1.3% in 2024, after 6.1% in 2023. Bank lending rates rose by a cumulative 116bp between September 2022 and the first quarter of 2024. Credit is the weak point. In June the Board expected credit to the non-financial sector to grow 4.4% in 2024 after 2.7% in 2023; by September it had lowered the 2024 forecast to 3.3%, with 4.7% expected for 2025.
Asset quality has deteriorated. The Coordination and Systemic Risk Monitoring Committee reported that the banking sector's NPL ratio rose from 8.5% at the end of 2023 to 8.8% at the end of May 2024, with provision coverage of around 68%. Earnings and capital provide a cushion: aggregate bank earnings rebounded by 20.4% in 2023 after a 13% contraction in 2022. On an individual basis, banks had an average solvency ratio of 15.5% and an average Tier 1 ratio of 12.9%, against minimums of 12% and 9%.
Jordan
The CBJ linked its 50bp cut to the strength of the dinar: foreign reserves reached USD 20 billion at the end of August 2024, enough to cover 8.7 months of imports. Inflation fell to 1.9% in August 2024 from a peak of 5.4% in September 2022. Bank deposits rose 6.8% year on year to JD 45.7 billion at the end of July 2024, while credit grew 3.5% to JD 34.6 billion. In the first half of 2024 the banking sector's capital ratio was 17.6%, legal liquidity was 138.8% and the NPL ratio was 5.6%. Banks' interest-rate margin had narrowed by about 114bp to 2.24% by the end of July 2024.
Cross-country comparison
MENA banking monitor: policy rates and system indicators (reference dates in brackets)
| Country | Policy rate after September 2024 decisions | September 2024 decision | Capital ratio | NPL ratio |
|---|---|---|---|---|
| Saudi Arabia | Repo 5.50% | Cut 50bp | Regulatory capital 20.1% (2023) | About 1.5% (2023) |
| United Arab Emirates | Base Rate 4.90% | Cut 50bp | 18.3% (Q2 2024) | Net NPL 2.4% (2023) |
| Kuwait | Discount rate 4.00% | Cut 25bp | Not available | Not available |
| Bahrain | Overnight deposit 5.50% | Cut 50bp | 19.7% (December 2023) | 2.9% (December 2023) |
| Qatar | Not available | Not available | 19% (Q2 2023) | 3.8% (Q2 2023) |
| Jordan | CBJ main rate 7.00% | Cut 50bp | 17.6% (H1 2024) | 5.6% (H1 2024) |
| Egypt | Overnight deposit 27.25% | Held (5 September) | 18.6% (December 2023) | 3.0% (December 2023) |
| Morocco | Key rate 2.75% | Held (24 September) | Solvency 15.5% (individual basis) | 8.8% (May 2024) |
Source: Saudi Central Bank (SAMA), SAMA's Decision on Repo and Reverse Repo Rates, 18 September 2024; International Monetary Fund, Saudi Arabia: 2024 Article IV Consultation-Press Release; and Staff Report (IMF Country Report No. 2024/280), 4 September 2024; Central Bank of the UAE (CBUAE), CBUAE Lowers the Base Rate by 50 Basis Points, 18 September 2024; Central Bank of the UAE (CBUAE), UAE Monetary, Banking & Financial Markets Developments - 2024 Q2, 31 August 2024; Central Bank of the UAE (CBUAE), Financial Stability Report 2023, 26 September 2024; Central Bank of Kuwait (CBK), CBK Cuts Discount Rate by 25 Basis Points to 4.00%, 18 September 2024; Central Bank of Bahrain (CBB), CBB Cuts Overnight Interest Rate by 50 basis points, 18 September 2024; Central Bank of Bahrain (CBB), Financial Stability Report, March 2024 (Issue No. 36), 31 March 2024; International Monetary Fund, IMF Executive Board Concludes 2023 Article IV Consultation with Qatar (PR24/39), 7 February 2024; Central Bank of Jordan (CBJ), Interest on monetary policy instruments and open market operations (policy-rate table), 22 September 2024; Central Bank of Jordan (CBJ), The Open Market Operations Committee decides to cut interest rates on the monetary policy instruments by 50 basis points, 22 September 2024; Central Bank of Egypt (CBE), MPC Press Release 5 September 2024, 5 September 2024; International Monetary Fund, Arab Republic of Egypt: Third Review Under the Extended Arrangement Under the Extended Fund Facility (IMF Country Report No. 24/274), 26 August 2024; Bank Al-Maghrib, Press release: Bank Al-Maghrib Board Meeting, Rabat, September 24, 2024, 24 September 2024; Bank Al-Maghrib, Press release: Nineteenth meeting of the Coordination and Systemic Risk Monitoring Committee, 2 July 2024.
Five of the seven central banks with a published September 2024 decision in the table cut rates, while Egypt and Morocco held. On the latest data, the Gulf systems with published figures and Egypt report capital ratios between 18.3% and 20.1%. Saudi Arabia, Bahrain, Qatar and Egypt report NPL ratios at or below 3.8%. Morocco and Jordan stand out for higher NPL ratios, of 8.8% and 5.6% respectively.
NPL ratios, latest available, %
Source: International Monetary Fund, Saudi Arabia: 2024 Article IV Consultation-Press Release; and Staff Report (IMF Country Report No. 2024/280), 4 September 2024; Central Bank of Bahrain (CBB), Financial Stability Report, March 2024 (Issue No. 36), 31 March 2024; International Monetary Fund, Arab Republic of Egypt: Third Review Under the Extended Arrangement Under the Extended Fund Facility (IMF Country Report No. 24/274), 26 August 2024; International Monetary Fund, IMF Executive Board Concludes 2023 Article IV Consultation with Qatar (PR24/39), 7 February 2024; Central Bank of Jordan (CBJ), The Open Market Operations Committee decides to cut interest rates on the monetary policy instruments by 50 basis points, 22 September 2024; Bank Al-Maghrib, Press release: Nineteenth meeting of the Coordination and Systemic Risk Monitoring Committee, 2 July 2024.
Risks and outlook
For the Gulf, lower rates arrive while Saudi credit growth still exceeds deposit growth and government-related entities supply 31.5% of deposits, which leaves bank funding tied to the state. In the UAE, the IMF's call to watch real-estate activity and the planned return of reserve requirements to 14% are the counterweights to cheaper money. Kuwait's problem is the opposite: private credit growth of 1.8% in 2023 leaves little sign of overheating. In Egypt, the disinflation path depends on the tight stance holding until the decline expected in Q1 2025, and banks' foreign-currency lending to public entities remains the main balance-sheet mismatch. In Morocco, an NPL ratio of 8.8% and a lowered credit forecast point to a slower and riskier lending cycle than in the Gulf.
What to watch
- 6–7 November 2024: the next FOMC meeting on the Federal Reserve's tentative schedule; the CBUAE Base Rate is anchored to the Federal Reserve's IORB.
- End-September 2024: the CBE is to share the results of banking-sector stress tests on end-March 2024 data with IMF staff.
- Egypt's fourth EFF review, expected on or after 15 September 2024, to which SDR 922.87 million is attached.
- Q1 2025: the CBE expects inflation to decline significantly.
Primary sources: Central Bank of the UAE (CBUAE), UAE Monetary, Banking & Financial Markets Developments - 2024 Q2, 31 August 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 September 2024), 18 September 2024; Saudi Central Bank (SAMA), SAMA's Decision on Repo and Reverse Repo Rates, 18 September 2024; Central Bank of the UAE (CBUAE), CBUAE Lowers the Base Rate by 50 Basis Points, 18 September 2024; Central Bank of Bahrain (CBB), CBB Cuts Overnight Interest Rate by 50 basis points, 18 September 2024; Central Bank of Egypt (CBE), MPC Press Release 5 September 2024, 5 September 2024; Bank Al-Maghrib, Press release: Nineteenth meeting of the Coordination and Systemic Risk Monitoring Committee, 2 July 2024; Central Bank of Kuwait (CBK), CBK Cuts Discount Rate by 25 Basis Points to 4.00%, 18 September 2024; Central Bank of Egypt (CBE), Special MPC Press Release 6 March 2024, 6 March 2024; Bank Al-Maghrib, Press release: Bank Al-Maghrib Board Meeting, Rabat, June 25, 2024, 25 June 2024; Bank Al-Maghrib, Press release: Bank Al-Maghrib Board Meeting, Rabat, September 24, 2024, 24 September 2024; International Monetary Fund, Saudi Arabia: 2024 Article IV Consultation-Press Release; and Staff Report (IMF Country Report No. 2024/280), 4 September 2024; International Monetary Fund, Arab Republic of Egypt: Third Review Under the Extended Arrangement Under the Extended Fund Facility (IMF Country Report No. 24/274), 26 August 2024; International Monetary Fund, IMF Executive Board Concludes 2024 Article IV Consultation with Saudi Arabia (PR24/316), 3 September 2024; Central Bank of Jordan (CBJ), The Open Market Operations Committee decides to cut interest rates on the monetary policy instruments by 50 basis points, 22 September 2024; Central Bank of Jordan (CBJ), Interest on monetary policy instruments and open market operations (policy-rate table), 22 September 2024; Central Bank of Egypt (CBE), MPC Press Release 18 July 2024, 18 July 2024; Central Bank of Bahrain (CBB), Financial Stability Report, March 2024 (Issue No. 36), 31 March 2024; International Monetary Fund, IMF Executive Board Concludes 2023 Article IV Consultation with Qatar (PR24/39), 7 February 2024; Central Bank of the UAE (CBUAE), Financial Stability Report 2023, 26 September 2024; Central Bank of the UAE (CBUAE), The CBUAE Releases Financial Stability Report 2023, 26 September 2024; Emirates NBD, Emirates NBD delivers record AED 13.8 billion profit in H1-24, up 12% y-o-y (results press release), 18 July 2024; International Monetary Fund, IMF Staff Completes 2024 Article IV Mission to United Arab Emirates (PR24/137), 20 May 2024; International Monetary Fund, IMF Staff Concludes Staff Visit to Kuwait (PR24/147), 9 May 2024; International Monetary Fund, IMF Staff Concludes Staff Visit to Oman (PR24/154), 13 May 2024; International Monetary Fund, IMF Executive Board Completes the Third Review of the Extended Arrangement under the Extended Fund Facility for Egypt (PR24/293), 29 July 2024; Board of Governors of the Federal Reserve System, Federal Open Market Committee announces tentative meeting schedule for 2024, 23 June 2023.