Today's Edition
A. SREENIVASA REDDY (ABU DHABI)
UAE banks exhibit the highest resilience to capital outflows and market stress in the Gulf region, according to S&P Global Ratings’ latest stress-testing report issued in the context of escalating relations between Iran and Israel. The agency’s hypothetical scenarios assessed the potential impact of severe financial shocks on banking systems across the GCC.
“The UAE banks have the strongest net external asset position in the region and therefore show the highest resilience to our hypothetical capital outflows,” the S&P Ratings stated.
Under S&P’s hypothetical stress assumptions, external funding outflows across the GCC could reach about $240 billion, equivalent to approximately 30% of the cumulative external liabilities of the systems tested. The report finds that GCC banks have sufficient external liquidity to withstand such a shock in most cases — assuming they are able to liquidate their external assets.
“The UAE banks have the strongest net external asset position in the region and therefore show the highest resilience to our hypothetical capital outflows,” the S&P Ratings said.
In its severe stress scenario, the S&P projected that GCC banks could also face up to $290 billion in local private sector deposit outflows. However, the report concluded that banks across the region — particularly those in the UAE — are well-equipped to withstand such pressures. S&P also noted that in cases where asset liquidity is lower than assumed, central banks would likely intervene to provide support, underscoring systemic safeguards.
The agency examined possible deterioration in asset quality and its effect on bank profitability and capital buffers. Under a high-stress scenario, 16 of the top 45 banks in the region could face cumulative losses of just over $5 billion, equal to 3% of total equity of those affected banks as of year-end 2024.
In a severe stress scenario, 26 banks could incur losses totalling approximately $30 billion, representing 10% of the affected banks’ equity base.
Despite these figures, the average Tier 1 capital ratio — a key measure of a bank's core financial strength — would remain at about 15% among the banks experiencing losses. This is well above minimum international regulatory standards and suggests the shock would be a profitability event rather than a solvency crisis.
As of 31 December 2024, GCC banks reported an average return on assets of 1.7%, reflecting a robust income-generating capacity. Their average Tier 1 capital ratio stood at 17.2%, which S&P said would help banks absorb stronger-than-expected shocks if needed.
Tier 1 capital refers to the core capital a bank holds in reserve — including equity and disclosed reserves — and serves as a cushion against unexpected losses. Higher ratios indicate better ability to weather financial stress.
S&P’s findings reinforce the strength of the UAE banks, which have benefited from strong regulatory oversight, sovereign backing, and diversified funding structures. The agency concluded that the hypothetical shocks posed more of a challenge to earnings than to solvency, given the structural soundness of the region’s banking business models.
S&P outlines several channels through which the crisis could impact regional credit markets, including disruption to key transportation routes, fluctuating energy prices, weakened tourism inflows, capital outflows, increased security-related government spending, and declining consumer and investment confidence.
S&P emphasised that higher oil prices, while beneficial in principle, would only support regional credit profiles if oil production remains steady, trade routes stay open, and global demand persists. “Higher oil prices will only benefit the region if production continues, global demand is sustained, and trade routes remain open,” it said.
