(Bloomberg) — While banks in Saudi Arabia and the United Arab Emirates can look forward to burgeoning loan growth in 2020, higher earnings could be slow to follow as lower interest rates pressure profit margins.

Lending in the U.A.E. is expected to get a lift from Dubai’s hosting of a six-month exhibition involving more than 190 countries. In addition, economic growth is forecast to rise to 2.5% from 1.6% last year, according to estimates compiled by Bloomberg. A regional expansion by U.A.E. banks may also add to revenue, as a government-backed mortgages program in Saudi Arabia fuels demands home loans.

“Expo 2020 is a key catalyst — which can offer a boost to both corporate and consumer spending — and provide impetus to tourism,” JPMorgan Chase & Co. analyst Naresh Bilandani said in an email. “We’re seeing an improvement in credit volumes in Saudi Arabia, a recovery in loan growth in Turkey in the fourth quarter of 2019, and strong volume in Egypt. These trends will also be supportive of U.A.E. banks’ loan growth in 2020.”

The outlook for profit is less certain as rate cuts by the Federal Reserve reduce the banks’ income from charges on loans. Central banks in the Gulf tend to move in lockstep with the Fed to protect their currencies’ peg to the dollar. Non-performing loans in the U.A.E. jumped to their highest level in more than five years in 2019 amid a slump in property prices.

“The oversupply in the U.A.E. property market could continue to offer downside risk to our impairment-charge expectations for 2020,” Bilandani said. “Rising geopolitical risk in the Middle East North Africa region could also offer negative surprises to the cost of risk.”

Average credit growth at the top U.A.E. lenders may accelerate by 5%-6% this year from 4% in 2019, he said.

Saudi Mortgages

In neighboring Saudi Arabia, loans may increase by an average of 7%, compared with about 6% in 2019, Bilandani said.

Saudi retail mortgages will continue to remain a key driver of credit after expanding 31% year-on-year during the third quarter, compared with total-loans growth of 4%, he said.

The kingdom in 2018 started a loan-guarantee program to improve access to housing financing and support down-payments as part of Crown Prince Mohammed bin Salman’s plan to diversify the economy and reduce its dependence on oil.

“Corporate volumes are also starting to show some pick-up,” Bilandani said.

Net-income growth at the biggest Saudi banks could slow to about 4% in 2020, compared with 14% last year, as the costs of holding deposits outpace deposit growth, Bilandani said.

What Bloomberg Intelligence Says:

“The outlook for Gulf banks is supported by government infrastructure investment, MSCI index-inclusion and M&A activity, though slower reform and oil prices are potential risks.

“Property and debt cast a shadow on U.A.E. valuations, but transformation via M&A and digital will be key to their prospects after 2020-21.”

Saudi banks will be looking to the nation’s sovereign wealth fund to help fuel lending as the government reduces expenditure, said Aarthi Chandrasekaran, a portfolio manager at Shuaa Capital. And while lower net interest margins will filter through this year to banks in the region, lower interest rates “are positive for lending growth and credit quality of the banking sector,” she said.

Mega-projects in Saudi Arabia during the second half of the year will also boost lending, Arqaam Capital Ltd. analysts led by Jaap Meijer said in a note. While the outlook for banks in the Gulf Cooperation Council will be challenging in 2020, indications that the Fed will hold interest rates means the “medium-term outlook has notably brightened.”