GCC banks are generally resilient enough to weather the fallout from escalating global trade tensions, particularly US tariff policies, S&P Global Ratings has said in a new report.
However, the report outlined several negative implications that could challenge the financial stability of lenders in the region.
GCC banks hold a significant portion of their assets, 20-25 per cent, in high-quality fixed-income instruments, making them susceptible to capital market volatility, the report noted. While outright losses are seen as unlikely unless banks are forced to liquidate investments to counter capital flight, institutions with debt or capital market advisory arms could face reduced revenues. Although these activities contribute modestly to overall income, a significant drop could dent profitability for those heavily reliant on them.
Banks with substantial exposure to capital markets or private equity investments also face increased vulnerability, the report said. Margin lending, which is linked to declining valuations, presents further risks. While these loans are typically well-collateralised and represent a small part of lending portfolios, a sharp market downturn could still pressure asset quality and necessitate higher provisions.
S&P anticipates a modest 25-basis-point cut in US Federal Reserve rates, which GCC central banks are expected to mirror, providing some support to bank profitability. However, more aggressive rate cuts could squeeze net interest margins and slow loan growth, eroding profits, particularly for banks with thin margins or a heavy reliance on interest income.
The report highlighted that market volatility could lead to reduced capital inflows, and some banks might experience outflows. Stress tests conducted by S&P assumed severe scenarios, including the exit of 50pc of non-resident interbank deposits and 30pc of non-resident deposits, alongside haircuts on assets. While most GCC banking systems could withstand these shocks, Qatari banks were identified as particularly vulnerable due to their significant net external debt. Even with government support, such outflows could strain liquidity and increase funding costs.
S&P modelled two scenarios for increases in non-performing loans (NPLs): a 30pc rise and a 50pc increase with a 7pc minimum NPL ratio. These scenarios resulted in cumulative losses of $5.3 billion and $30.3bn, respectively, for the top 45 GCC banks. While these losses are below the $60bn in net income earned in 2024, they could significantly impact profitability, especially for banks with weaker capital buffers or higher existing NPL levels.
The report also pointed to regional variations. Saudi banks, while generally well-positioned, might face challenges in financing ambitious Vision 2030 projects if access to capital markets is restricted, potentially delaying national development goals. Qatari banks’ high external debt exposure increases their risk profile, even with state backing. In contrast, UAE banks benefit from strong net external asset positions, offering greater resilience, though this varies across the region.
In conclusion, while GCC banks demonstrate broad resilience, the potential negative consequences, including revenue declines, rising NPLs, liquidity pressures, and strategic constraints, underscore existing vulnerabilities. Qatari banks and those with significant capital market or external exposures face the most pronounced risks. Regulatory forbearance, similar to measures taken during the Covid-19 crisis, could help mitigate the impact, but prolonged trade tensions and a worsening global economic outlook could test the sector’s buffers.
avinash@gdnmedia.bh
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