Gulf Cooperation Council (GCC) banks’ US dollar debt issuance is on track for its strongest quarter ever in Q1 2024, with issuance already exceeding the full-year 2023 total, Fitch Ratings says.

 

Annual issuance in 2024 and 2025 could exceed the 2020 record of $25.2 billion, boosting liquidity to meet strong credit demand, it says.

 

Q1 2024 issuance has been driven by strong investor sentiment fuelled by high oil prices, and rapid credit growth in Saudi Arabia. The report expects these drivers to continue, and issuance will also be spurred by about $30 billion of maturities in 2024-2025 and lower US dollar interest rates. Fitch expects the Fed to cut rates by 75bp in 2024 and 125bp in 2025.

 

Year-to-date issuance is $20.1 billion, already surpassing the 2023 total of $15.2 billion. Banks in Saudi Arabia (A+/Stable) and the UAE (AA-/Stable) account for 33% and 26% of the YTD figure, respectively. This is the first time that Saudi Arabian banks have issued more US dollar debt than UAE banks. They have been increasingly active in international debt capital markets since 2020 to support their strong financing growth plans, diversify their funding bases, and more recently, to offset the high cost of liquidity domestically.

 

GCC banks account for about 10% of the medium-term US dollar debt issued by investment-grade banks in Q1 2024. They have paid an average coupon rate of about 5.2% for five-year senior unsecured issuance. They have also issued more short-term certificates of deposit (CDs) from large financial hubs, including New York, London, Hong Kong and Singapore. This expands their investor base, widens their liquidity pools and deepens their trade and business relationships. CDs from large financial hubs are 33% of GCC banks’ total YTD issuance.

 

GCC banks are also expanding their investor base through increasing issuance of sukuk. Sukuk accounts for 51% of YTD issuance excluding CDs, reflecting strong investor demand and pricing dynamics, the report says.

 

GCC banks have about $16.9 billion of US dollar debt maturing in 2024, split fairly even between the UAE, Saudi Arabia, Qatar and Kuwait. "We believe many banks front-loaded their issuance in 2023 and Q1 2024 ahead of maturities. However, we expect issuance to remain strong through the rest of 2024, with the annual total potentially exceeding the 2020 record," it says.

  

"We expect Saudi banks’ US dollar issuance to continue gathering pace due to the strong credit growth outlook, especially in the corporate segment, and tight liquidity in the banking sector. Coupon rates on Saudi banks’ five-year senior unsecured issuance in 1Q24 averaged 5.1%. This is well below the three-month Saudi Interbank Offered Rate of 6.2%, and we expect banks to continue to be attracted by pricing in the international capital markets as the cost of liquidity in the Saudi banking sector is likely to remain high this year despite strong deposit inflows from government-related entities," Fitch Ratings says.

 

GCC banks have about $13.3 billion of US dollar debt maturing in 2025. Most of this is at UAE and Qatari banks. A large amount of this is likely to be refinanced as improving financing conditions should support lower borrowing costs. The total US dollar debt issuance could exceed $20 billion in 2025 on the back of better financing conditions, it says.

 

GCC banks also have about $3.6 billion of US dollar additional Tier 1 instruments with first call dates in 2024-2025. Fitch expects all of the instruments to be called, which will also support issuance. - TradeArabia News Service