Gulf banks brace for deeper credit buffers

Banks across the Gulf are on course to set aside sharply higher sums for bad loans over the next two years, as investors and analysts weigh the knock-on effects of prolonged regional conflict, softer property sentiment and the possibility that stress in real estate could begin feeding through to bank balance sheets. Estimates compiled by Visible Alpha, part of S&P Global Market Intelligence, show aggregate provisions for loans and lease losses at GCC banks rising to $10.03 billion in 2026 and $11.59 billion in 2027, from $7.63 billion in 2025.

The pressure point is most acute in the UAE, where bank exposure to property remains a central concern as the war in the Middle East drags on. Mohamed Damak, managing director for financial institutions ratings at S&P Global Ratings, said the UAE, and Dubai in particular, is vulnerable to indirect effects because of its heavy reliance on expatriates and foreign capital flowing into real estate. He warned that a fall in rents could hurt debt servicing because much of the lending is tied to income-generating property.

Visible Alpha data cited in the report show Dubai Islamic Bank had the highest real estate loan-to-total loan ratio among the banks highlighted, at 25.50% at the end of 2025. First Abu Dhabi Bank followed at 25.14%, with Mashreqbank and Abu Dhabi Commercial Bank also among the more exposed lenders, while Emirates NBD had the lowest share at 10.66%. Analysts say that does not automatically signal a deterioration in asset quality, but it does mean investors are likely to scrutinise provisioning, sector concentrations and funding conditions more closely over the coming quarters.

Concerns about the banking outlook are tied closely to the changing mood in the UAE property market. Reuters reported in March that missile strikes had punctured part of the Gulf’s safe-haven image, unsettling investors and exposing the extent to which Dubai and Abu Dhabi depend on offshore demand to sustain a long-running building boom. Off-plan deals accounted for 65% of Dubai transactions in 2025, according to Betterhomes, underscoring how much of the market rests on expectations of continued demand rather than completed housing stock. Bond markets, a key funding channel for developers, were described at the time as effectively shut for new issuance as spreads widened across the sector.

That shift has begun to show up in transaction activity. Reuters reported on March 20 that Dubai property was showing early signs of strain, with Goldman Sachs analysts estimating a 37% year-on-year and 49% month-on-month fall in UAE real estate deals in early March. Some sellers were said to be cutting asking prices by 12% to 15%, while Citi outlined a bearish scenario in which property prices could fall by 7% a year through 2028. For banks, such moves matter because a sustained correction can weaken collateral values, delay project cash flows and increase the risk of defaults among smaller developers and subcontractors.

Even so, the banking system is not entering this period from a position of weakness. S&P said UAE banks came into the conflict with robust earnings, strong capitalisation and more diversified loan books than in earlier cycles. The five largest banks’ Texas ratios, which measure a lender’s ability to absorb future losses, have improved markedly in recent years. Mashreqbank’s ratio fell to 4.85% by the end of 2025 from 20% in 2021, while Dubai Islamic Bank’s ratio, though the highest among the five biggest lenders, dropped to 12.13%, less than half its earlier level.

The broader GCC picture is also more mixed than the headline provisioning numbers suggest. S&P said on March 17 that Gulf banks could face domestic deposit outflows of as much as $307 billion if the conflict deepens, but it added that no major outflows had yet been detected. Banks across the six Gulf states hold about $312 billion in cash or central bank reserves, with a further $630 billion potentially available through liquidation of investment portfolios after haircuts. S&P’s judgement was that, overall, the risk still appeared manageable, helped by strong sovereign support and more active regulatory supervision.

UAE lenders have also continued to benefit from strong balance-sheet growth. According to Reuters, citing central bank data, total banking assets rose 17.1% in 2025 to 5.34 trillion dirhams, while loan portfolios expanded by nearly 18% and deposits grew around 16%. That momentum provides a buffer, but analysts caution that loan impairment trends often lag the initial shock. Sectors seen as most exposed include logistics, transport, tourism, real estate, retail and hospitality, all of which are sensitive to confidence, cross-border flows and shifts in regional risk pricing.