Gulf banks face slower growth as war risks rise

Gulf Cooperation Council banks are bracing for slower growth as the Middle East war and wider geopolitical uncertainty weigh on credit demand, investor confidence and corporate activity, even as lenders retain strong profitability, capital buffers and stable funding.

S&P Global Ratings analyst Tatjana Lescova said banks across the six-nation bloc are expected to continue delivering solid earnings despite pressure from the conflict, higher risk premiums and uneven economic momentum. The assessment points to a more cautious operating environment rather than a sharp deterioration in bank balance sheets.

The region’s lenders entered 2026 with strong capital positions, healthy liquidity and broad support from sovereign credit profiles. Total domestic deposits in the GCC rose by about 4.2 per cent in the first quarter, with growth accelerating to 6.2 per cent year-to-date through the end of April. That helped offset a decline in interbank funding among the region’s 50 largest banks.

Domestic private-sector deposits grew at an annualised rate of 11.6 per cent by the end of April, broadly matching the pace recorded in 2025. Saudi Arabia provided a major boost, supported by continuing economic activity linked to investment projects, consumption and non-oil sector expansion. Government and public-sector deposits expanded at an annualised rate of about 36 per cent, led by the UAE and Kuwait, where public liquidity helped counter softer private-sector deposit trends.

The funding picture has so far remained orderly. Significant external funding outflows have not been observed, although some depositors temporarily moved funds out of the region at the start of the Iran war before bringing them back. The reversal reflected expectations that the conflict would be contained and confidence that authorities had the tools to protect financial stability.

The risk outlook remains more complex. A prolonged conflict could weaken public finances, delay investment decisions and affect sectors linked to tourism, consumer spending, aviation, logistics and energy. Higher insurance, transport and financing costs could also pressure corporate margins, while weaker confidence may slow discretionary capital expenditure and reduce debt issuance volumes during 2026.

Banks with large exposure to trade, real estate, small businesses and consumer lending could face more uneven asset-quality trends if the conflict keeps affecting confidence and supply chains. Lenders in stronger sovereign systems, particularly the UAE, Saudi Arabia, Qatar and Kuwait, are better placed to absorb pressure because of stronger government balance sheets, deeper liquidity and more diversified funding sources.

The UAE banking system continues to benefit from resilient domestic activity, inflows linked to trade and wealth management, and a strong deposit base. Saudi lenders remain supported by Vision 2030-linked investment, although credit growth may moderate if companies reassess expansion plans or project timelines. Kuwaiti banks are supported by public-sector liquidity, while Qatari lenders retain access to government-related deposits and deep links to the hydrocarbon economy.

Bahrain and Oman remain more exposed to funding and sovereign constraints than larger GCC peers. Higher public debt, smaller fiscal buffers and more limited domestic liquidity give their banking systems less room to absorb prolonged external shocks. Still, regulatory oversight and established banking franchises provide an important line of defence against a broader funding squeeze.

Capital remains a central strength across the region. GCC banks generally hold comfortable regulatory buffers and have benefited from several years of strong earnings, higher interest rates and conservative provisioning. Profitability has been supported by net interest margins, although the advantage could narrow if global rates move lower or funding costs remain elevated.

The broader macroeconomic setting is tied closely to hydrocarbons. Strong oil and gas revenues have helped governments sustain expenditure and liquidity, but prolonged disruption to energy flows, shipping routes or insurance markets could change the outlook quickly. The Strait of Hormuz remains a key route for Gulf energy exports, making any escalation a direct risk to trade, fiscal revenue and market sentiment.