S&P: Gulf banks can withstand major escalation of the war

Standard & Poor’s (S&P) has forecast that the war will lead to slower growth, weaker profitability, and a decline in asset quality indicators for banks in the Gulf Cooperation Council (GCC) countries. At the same time, we believe that banks will be able to absorb these impacts, aided by their strong capital margins, the cyclical decline in non-performing loans, current provision margins, limited exposure to directly affected sectors, and regulatory easing measures.

The agency stated: “In the event of a significant escalation of the war, there could be a sharp slowdown in economic activity and investor sentiment, leading to more severe negative repercussions for Gulf banks. However, even in this scenario, we expect banks to be able to withstand a high level of stress, which could take the form of capital flight or a sharp deterioration in asset quality.”

The agency expects a slight decline in the profitability of banks in GCC countries during the 2026–2027 period. Rising risk costs and slower credit expansion will be key contributing factors, although stable interest rates and improved efficiency will help mitigate these effects. Despite interest rate cuts over the past two years, time deposits still account for slightly more than 50% of customer deposits, with the exception of the United Arab Emirates and the Sultanate of Oman. The agency noted that Kuwait’s banking system enjoys ample foreign liquidity to withstand stress levels.

Furthermore, larger domestic economies and faster growth have supported bank profitability in the UAE and Saudi Arabia, leading to improved operational efficiency across the region. Relatively low financing costs and continuous reductions in risk costs over the past few years have supported their net interest margins, which are the highest in the region, reaching between 2.7% and 2.8% at the end of March.

The report added: “We do not believe that lower profitability is likely to weaken the financial resilience of banks in GCC countries, given their strong capital margins. The average Tier 1 capital ratio for the top 50 banks in the region stood at around 17% at the end of March 2026.”