Gulf banks, which have proved resilient since war in the Middle East broke out, could face a domestic deposit outflow of $307 billion if the conflict deepens, according to S&P Global Ratings.
S&P said it had found no evidence of major outflows of foreign or local funding so far, but cautioned that a prolonged conflict could trigger a flight to quality between banks within the same systems, as well as broader external and local funding exits.
The ratings agency's base case scenario assumes the most intense phase of the war lasts two to four weeks, though it acknowledged that spillovers and intermittent security incidents could extend beyond that window, it said in a report dated March 16.
The U.S.-Israeli war on Iran is in its third week with no end in sight.
Under its hypothetical stress scenario, domestic deposit outflows across the six Gulf Cooperation Council banking systems could reach $307 billion based on year-end 2025 figures, S&P said.
Banks currently hold around $312 billion in cash or at central banks to absorb such outflows, with an additional buffer of roughly $630 billion available after liquidating investment portfolios at a 20% haircut, S&P added.
"Overall, the risk appears manageable," S&P said, adding that four of the six GCC countries are considered highly supportive of their banking systems and that regional regulators have stepped up supervision since hostilities began.
Bahraini retail banks appear more vulnerable given recent increases in external debt, S&P added.
The UAE central bank has moved to reassure markets.
Governor Khaled Mohamed Balama said earlier this month the banking sector has continued to operate normally.
UAE banks have benefited recently from rising credit demand as regional governments pour billions of dollars into sectors such as tourism and infrastructure.
Still, bank shares have tanked since the war began, with double-digit dives for all the major lenders (ENBD.DU), opens new tab, (FAB.AD), opens new tab, (ADCB.AD), opens new tab . On asset quality, S&P said the full impact on banks’ loan books will take time to materialise, with logistics, transportation, tourism, real estate, retail and hospitality among the most exposed sectors.
Under a high-stress scenario assuming either a 50% increase in non-performing loans (NPL) or a NPL ratio of 7% of total loans, whichever is greater, cumulative losses across the region’s top 45 banks could reach around $37 billion, S&P said.
The agency said GCC banks are entering the stress period from a position of relative strength.
It drew parallels with the 2020 COVID-19 shock, noting that regulators deployed measures at the time to allow banks to absorb loan impairments, and said it expected a similar response if conditions deteriorated.
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