Gulf banks withstand war shock, but asset quality risks loom, says S&P

2026-03-17 - 19:33

A recent analysis by S&P Global Ratings found that Gulf banks have so far managed to maintain stable operations despite regional tensions, supported by effective business continuity plans. While the risk of capital outflows remains contained in the short term, the agency cautioned that the long-term impact on asset quality is still uncertain and could intensify depending on how long the conflict lasts and how widely it spreads. S&P’s baseline scenario assumes that the most intense phase of the conflict will last between two and four weeks. However, it warned that broader repercussions—such as sporadic security incidents and economic disruptions—could extend beyond this period, leaving uncertainty over the full extent of potential credit risks. The report highlighted growing pressures, including volatility in energy markets, reduced oil and gas output in Gulf countries, disruptions to trade and supply chains, and weakening investor and consumer confidence, particularly in sectors sensitive to sentiment. Business Continuity Measures According to S&P, many Gulf banks activated contingency plans, including shifting staff to remote work and limiting branch operations. Although some banks experienced temporary service disruptions due to reported drone-related damage to data centers, most institutions were able to maintain operations by relying on multiple data centers and backup systems. In areas less affected by security concerns, several banks have already resumed normal operations or did not transition to remote work at all. Liquidity and Capital Resilience Despite assumptions of potential capital outflows under stress scenarios, S&P believes Gulf banks maintain strong external liquidity positions. These buffers are sufficient to absorb significant outflows without requiring government or external support in most countries, with the exception of Bahrain and Qatar. Bahraini retail banks appear more exposed due to rising external debt levels, though risks are partly mitigated by the fact that much of this debt is owed to regional creditors with a vested interest in maintaining stability. Meanwhile, Qatari banks could face liquidity shortfalls in the event of large capital outflows, but these are considered manageable and relatively small compared to past support measures. After accounting for potential asset liquidation, Gulf banks are estimated to have around $630 billion in available liquidity. S&P also noted that four of the six Gulf states have strong financial support frameworks for their banking sectors and are likely to help if needed. Since the escalation began, regulators across the region have stepped up oversight and signaled readiness to intervene. Asset Quality Outlook The agency expects the conflict to impact key economic sectors such as logistics, transportation, tourism, real estate, retail, and hospitality. However, the full effect on banks’ asset quality will take time to materialize. Overall, bank profitability in 2026 is expected to decline, with the extent depending on the duration and economic fallout of the conflict. Gulf banks currently maintain strong financial fundamentals, with an average Tier 1 capital ratio of 17.1% among the top 45 banks as of end-2025. Non-performing loans stand at 2.5%, with coverage ratios at 158.7%. Under a high-stress scenario, S&P assumes either a 50% increase in non-performing loans or a rise to 7% of total loans. In such a case, banks could face cumulative losses of around $37 billion, compared to $66 billion in net income recorded by the end of 2025, potentially pushing many banks into losses. Nevertheless, S&P pointed to past interventions—such as during the COVID-19 pandemic—when regulators introduced relief measures that helped banking systems absorb shocks. It expects similar support if conditions worsen.