Expected Impact of U.S. Monetary Policy Tightening on GCC Banks

The US Federal Reserve is on track to change its monetary policy stance with start of asset purchase taper expected in Q4 2021 and rate hikes starting in 2022/2023. The central banks of GCC countries mostly follow changes in the US Federal Reserve Rate, considering the pegged exchange rate regimes. The last time such rate hike cycle was followed (2015-2019), there were specific set of winners in terms of GCC banks, who witnessed substantial rise in their market capitalization. We conducted a detailed analysis to study how changes in the US monetary policy affects the profitability of GCC banks over the past 13 years (quarterly intervals). The study, conducted using statistical tools such as correlation between policy rates and net interest margins (NIMs) revealed interesting findings. The US Fed is clearly on track to start raising rates sooner rather than later, and we expect GCC central banks to follow suit, thus creating the grounds for changes in GCC banks' profitability trends, with Saudi Arabian banks likely to emerge winners among GCC banks.