Today's Edition
A.SREENIVASA REDDY (ABU DHABI)
Among all GCC banks, UAE banks have the strongest net external asset position in the region and therefore show the highest resilience to hypothetical capital outflows, triggered by the current volatility caused by the US imposition of tariffs, observed the S&P Global Ratings in an analysis.
Amid rising global trade tensions and weakening investor confidence, the S&P Global Ratings said: “Intensifying global trade tensions are weighing on global credit conditions and threatening what has, until recently, been a favourable environment for most borrowers.”
While the full imposition of paused US tariffs could have broad and deep economic consequences, Gulf banks are expected to weather the storm better than most.
The report identified market volatility and investor risk aversion as the most imminent threats to the region’s banking systems. However, it said that the impact of capital market volatility is expected to remain manageable for banks, given that high-quality fixed-income instruments tend to dominate their investment portfolios.
While capital outflows remain a risk, S&P conducted a series of hypothetical stress scenarios — including assumptions of losing 50% of non-resident interbank deposits and 30% of non-resident deposits. “Most GCC banking systems appear capable of handling the hypothetical outflows,” the agency said.
“Assuming outflows of 50% of nonresident interbank deposits and 30% of nonresident deposits and haircuts of 20% on investments and 10% on due from banks, among other assumptions, the UAE banks are not only capable of handling the outflows but would also still have $186 billion of liquid assets that can be deployed in case the outflows exceed our stress scenario,” Dr. Mohamed Damak, Managing Director, Sector Lead Financial Institutions Middle East and Africa at S&P Global Ratings, told Aletihad.
“This surplus is the strongest among the six GCC countries banking systems,” Damak added.
Qatar’s banking system was seen as comparatively more vulnerable due to its “significant net external debt position”. Nevertheless, “the Qatari government's strong track record of support for the banks and its capacity to help them during times of stress mitigate the risks,” the report added.
In Saudi Arabia, the picture was more nuanced. “While banks' actual position appears comfortable, if they are unable to continue to tap the capital markets, their capacity to continue financing Vision 2030 projects might diminish,” S&P noted.
Looking at profitability, S&P said it expects only a modest rate cut from the US Federal Reserve and corresponding moves by GCC central banks, which will support GCC banks' profitability. But it warned that “if policy rates drop more sharply, lower margins and potentially softer lending growth could weaken banks’ profitability.”
The analysis also highlighted risks stemming from falling oil prices. S&P revised its assumption to $65 per barrel for the rest of 2025, warning that further declines “could mean lower economic growth in both the oil and non-oil sectors.”
Even under adverse conditions, GCC banks appear well-prepared. GCC banks displayed strong asset-quality indicators prior to the start of the turmoil, with an average nonperforming loan (NPL) ratio of 2.9% for the region's top 45 banks at year-end 2024. “Banks had also set aside provisions in excess of 150% of their stock of NPLs,” and the average return on assets was “1.7% at year-end 2024.” The average Tier 1 capital ratio stood at a healthy 17.2%.
In its conclusion, S&P said: “Even in our worst-case scenario, we still expect the shock to affect banks’ profitability rather than their solvency.”
