(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].)
Key Takeaways
- While Gulf Cooperation Council (GCC) countries' direct exports to the U.S. are low, the indirect effects of the intensifying trade tensions could be significant.
- Market volatility and investor risk aversion are the most imminent threats, but banks appear capable of handling the pressure.
- A significant reduction in oil prices could impinge on government spending and economic sentiment and lead to an increase in nonperforming loans, although this is likely to affect banks' profitability rather than their solvency.
Intensifying global trade tensions are weighing on global credit conditions and threatening what has, until recently, been a favorable environment for most borrowers. If the U.S. administration ultimately implements the paused tariffs as it initially announced, the economic fallout would be broad and deep.
In any case, the announced pause on tariffs for all countries but China is for 90 days, and the prevailing uncertainty is likely to further undermine business and consumer confidence, heightening concerns about corporate investment, employment and consumer spending, and overall economic activity.
Within this context, we have examined the possible channels of transmission for GCC banks. Based on our hypothetical stress scenarios, banks appear capable of handling the potential implications thanks to their good liquidity, profitability and capitalization.
The Most Imminent Threats Are Market Volatility And Investor Risk Aversion
GCC banks appear to be in a good position to withstand these threats. Their investment portfolios typically account for 20%-25% of their total assets. High-quality fixed-income instruments tend to dominate, with a limited contribution from riskier investments. We therefore expect the impact of the capital market volatility to remain manageable for banks. Moreover, losses are unlikely to materialize unless banks need to liquidate some investments to deal with capital outflows, which we don't expect to happen.
For some banks that are active in debt or capital market advisory services, the current volatility could result in lower revenues. However, on average, these activities only contribute modestly to banks' revenues.
Some GCC banks are more dependent on capital markets or private-equity investments and therefore may be more vulnerable. Margin lending is another source of risk as valuations decline. However, we understand that these loans' contribution to banks' overall lending books is limited, and that their coverage of these loans with collateral tends to be conservative.
As it stands, we expect the U.S. Federal Reserve to lower its policy interest rate by just 25 basis points this year and the GCC's central banks to follow suit. This will support GCC banks' profitability. However, if policy rates drop more sharply, lower margins and potentially softer lending growth could weaken banks' profitability.
GCC Banks Can Cope With Hypothetical Capital Outflows
Given the current market volatility, GCC banks are likely to see lower capital inflows, and some could even experience outflows. To quantify the risk, we conducted hypothetical stress scenarios assuming large outflows of external funding, including, among others, 50% of nonresident interbank deposits and 30% of nonresident deposits. We also assumed haircuts on external assets (see table 1).
Based on our calculations, most GCC banking systems appear capable of handling the hypothetical outflows (see chart 1). Qatari banks are more vulnerable than others in the region due to their significant net external debt position, but 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.
In Saudi Arabia, 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. United Arab Emirates banks have the strongest net external asset position in the region and therefore show the highest resilience to our hypothetical capital outflows.
Table 1
| Stress test assumptions | ||||||
|---|---|---|---|---|---|---|
| Cash | Due from banks | Due from branches abroad | Investments | Loans to nonresidents | Other assets | |
| Asset haircuts | 0% | 10% | 20% | 20% | 100% | 100% |
| Nonresident deposits | Due to nonresident banks | Due to head office and branches | Debt | Other outflows | ||
| Outflows | 30% | 50% | 20% | 10% | 0% | |
Chart 1
A Lower Oil Price Could Lead To Weaker Asset Quality
The intensifying trade tensions have resulted in a significant decline in oil prices. We have revised our oil price assumption to $65 per barrel for the rest of 2025 and believe that this will likely impinge on government spending and economic growth in the region. If the oil price drops even further, this could mean lower economic growth in both the oil and non-oil sectors and higher pressure on banks' asset-quality indicators.
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 (see chart 2). Banks had also set aside provisions in excess of 150% of their stock of NPLs on the same date, which provides them with some cushion to absorb additional shocks. In addition, GCC banks' profitability remains relatively good, with returns on assets of 1.7% at year-end 2024. Banks continue to display strong capitalization, with an average Tier 1 capital ratio of 17.2% on the same date.
To assess banks' resilience, we tested two hypothetical stress scenarios (see table 2). The first scenario assumes a potential increase in NPLs of 30% from the reported figure at year-end 2024 and sets the NPL ratio at least at 5%, whichever is higher. The second scenario assumes a 50% increase and sets the NPL ratio at least at 7%. Based on our calculations, 16 of the top 45 banks in the region will likely display cumulative losses of $5.3 billion in the first scenario. The losses increase to $30.3 billion in the second scenario, affecting 26 of the top 45 banks.
In both cases, the cumulative impact is below the $60 billion in net income that the top 45 banks in the GCC generated in 2024. This means that even in our worst-case scenario, we still expect the shock to affect banks' profitability rather than their solvency.
The regulators' reaction is also important in assessing how the situation unfolds. During the COVID-19 pandemic, for example, the regulators introduced forbearance measures that helped the banks navigate the uncertainty. We expect them to take a similar action if the impact of the global trade tensions on the GCC economies exceeds our current expectations.
Chart 2
Table 2
| Impact of hypothetical increase in NPLs | ||||||||
|---|---|---|---|---|---|---|---|---|
| Scenario 1 | Scenario 2 | |||||||
| NPLs | NPLs increase by 30% with the mimimum at 5% | NPLs incease by 50% with the minimum at 7% | ||||||
| Coverage | Allocation of excess provision and 100% coverage | Allocation of excess provision and 100% coverage | ||||||
| (Bil. $) | Existing | Increase | Increase | |||||
| NPL stock | 48.6 | 57.0 | 96.5 | |||||
| Existing | Cumulative loss for banks displaying losses | Cumulative loss for banks displaying losses | ||||||
| Net income of top 45 banks | 60.0 | -5.3 | -30.3 | |||||
| NPL--Nonperforming loan. | ||||||||
Related Research
- Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
- S&P Global Ratings Lowers Its Oil Price Assumptions On Potential Oversupply; Natural Gas Price Assumptions Unchanged, April 10, 2025
- How A Hypothetical Russia-Ukraine Ceasefire Could Affect United Arab Emirates Banks, March 10, 2025
- Qatar Banking Sector 2025 Outlook: Resilient Performance To Continue, Jan. 8, 2025
- GCC Banking Sector Outlook 2025: Profitability And Asset Quality Boost Resilience, Nov. 13, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contact: | Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com |
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