As UAE loan deferrals expire, GCC banks face their first real asset-quality test

GCC bank loan books have come through six months of the US-Israel-Iran war looking untouched. The first unsupported test of that comes this month, when the AED 13.5 bn of repayments the UAE let banks defer at the start of the conflict begins coming due. The deferrals cover more than 135k customers, more than doubled in size between May and July, and were granted without a default classification under the central bank’s March resilience package. The six-month clock on the earliest cohorts runs out this month and next, and what those borrowers do next is the first read on regional asset quality that regulators haven’t cushioned.

Every set of quarterly results since the war began has been reported with that support in place. Banks across the UAE, Saudi Arabia, Qatar, and Kuwait are posting rising bottom lines and non-performing loan (NPL) ratios at or near record lows. But these figures are early: Bank asset quality moves slowly, and three of the four regulators moved fast enough to keep the slow part from surfacing in a quarterly print.

What each regulator bought

The UAE went broadest first. Its 18 March Financial Institution Resilience Package let banks defer repayments for up to six months without a default classification, on top of reserve access, term liquidity and temporary capital relief.

Qatar’s version was half the size: A reserve-requirement cut to 3.5%, unlimited QAR repo, and a three-month deferral cap rather than six. Kuwait skipped the borrower-facing relief and went at bank balance sheets directly — the regulatory liquid ratio cut three percentage points to 15%, one point of the capital conservation buffer released. Deferrals for conflict-hit businesses came later.

Saudi Arabia did none of it. SAMA let a pre-scheduled countercyclical capital buffer increase — zero to 1%, effective 25 May — proceed in the middle of the war, adding SAR 34.6 bn to the sector’s capital requirements.

A quarter that had help

Saudi’s 10 listed banks swept the quarter, every one of them growing net income, taking combined 2Q net income up 8.2% to SAR 24.9 bn (USD 6.6 bn). Al Rajhi led at SAR 7.0 bn (USD 1.87 bn), up 14%, followed by Saudi National Bank at SAR 6.6 bn (USD 1.8 bn), up 7.6%.

The provisioning lines underneath tell you more than the headline. Riyad Bank’s net provisions for expected credit losses rose roughly 29%, capping net income growth at 2%. Arab National Bank went the other way, cutting quarterly credit-loss provisions 16.7% and beating analyst consensus on the bottom line by about 9%.

The UAE’s big three held up too. ADCB’s 2Q profit before tax rose 26%, with NPLs at a record-low 1.71%, while FAB’s NPL ratio sat at 2.2%. Emirates NBD grew slowest of the three, with 1H net profit up 2.6% against ADCB’s 34%. It also provisioned hardest, taking an AED 865 mn precautionary overlay in 1Q alone as part of an AED 1.4 bn 1H impairment charge. Its cost of risk ran at 42 basis points. QNB’s 1H profit rose 3% to QAR 8.67 bn.

Kuwait’s acceleration is the sharpest in the set. Its nine listed banks posted KWD 922.3 mn in aggregate 1H profit, up 4.6%, and eight of the nine grew faster in 2Q than in 1Q. NBK went from 1% growth to 4.5%; Gulf Bank to 22.6%; Warba to 23.4%; KIB to 26.3%.

Where the lag lives

“I wouldn’t say loan book quality is deteriorating,” Sam Gidoomal, managing director at Alvarez & Marsal Portfolio Advisory, which advises Gulf banks on distressed and non-performing loans, tells EnterpriseAM. A&M’s quarterly Banking Pulse report puts Saudi’s aggregate NPLs below 1% at the end of 2Q and the UAE’s near 2.3%, with provision coverage at 163% and 108.8% respectively. Stage 2 loans fell 1.4% in the UAE in 2Q, while stage 3 fell 1.9% in Saudi.

Gidoomal’s caveat sits further out on the calendar. “The structural risk sits in the medium term, particularly in credit quality for businesses reliant on global supply chains, imported inputs or foreign capital,” he says, adding that “pressure tends to build gradually and becomes clearer as support measures unwind.”

The mechanism is IFRS 9. Restructured loans can carry a longer maturity, an interest-only stretch, a reset covenant or fresh security, Gidoomal explains, and restructuring is itself one of the triggers for reassessing a loan’s risk stage. “A restructured facility performing under revised terms can migrate from Stage 3 to Stage 2, having demonstrated a period of performance against the revised loan agreement terms. Likewise, a Stage 2 loan can migrate to Stage 3, if it doesn’t hold,” he says.

That is where this package parts company with the last one. The 2020 pandemic relief came with an explicit order to freeze staging for participating borrowers. This one carries no equivalent instruction, which leaves the next two quarters of classification work to be done rather than waived, Gidoomal says. The UAE’s expiring deferrals are where that work starts.

Cost of risk is running on recoveries

Ranya Gnaba, an equity banking analyst at AlphaMena, sees the same lag inside the earnings line itself. Reported cost of risk, she tells us, “has been artificially suppressed so far, largely thanks to significant impairment recoveries and collections, particularly in 1Q” — a tailwind she does not expect to continue.

“Should the conflict persist, we could see a normalization or even an increase in provisioning over the coming quarters as the lagged impact on asset quality feeds through, especially in more cyclical, non-oil segments," she says.

Her sharpest flag is Emirates NBD: A very low reported cost of risk paired with a very high return on equity, which she reads as the widest gap in her coverage between what is booked now and what a normalized provisioning charge would eventually cost.

Edmond Christou, senior equity research analyst at Bloomberg Intelligence, puts the lag at six to 12 months. “If things turn out to be better than expected, we will see a reversal,” he says. “But if things turn out to be worse than expected, we see more provisioning.”

Working against that clock is a smaller exposure base. Banks have spent years cutting their tourism, hospitality, services, and real-estate books — the obvious channels for this war to bite — from the mid-to-high 20s as a share of the balance sheet down to roughly 11-12%, some closer to 10%.

Christou still flags Dubai Islamic Bank, National Bank of Fujairah, Commercial Bank International and Commercial Bank of Dubai as carrying heavier real-estate and services exposure on thinner buffers, against Emirates NBD, FAB and ADCB, which cut earlier and provisioned harder.

Saudi’s exposure runs through contractors

Saudi Arabia avoided the direct hit the UAE, Qatar and Kuwait took, but its banks aren’t immune. The pressure travels through a different channel: Giga-project rationalization, contractor cash flow and rising import costs. Alinma has already booked higher provisions tied to contractors caught by project cancellations.

Gidoomal sees the same pattern from a different set of mandates. Real estate and construction stress today, he says, “sits less with developers holding land and completed stock and more in the contracting layer beneath them, where margins are thin and receivables cycles are long.”

Saudi banks are also provisioning differently from their UAE peers, releasing buffers to support profit rather than building them. If credit growth slows as rates inch up, that stacks a second pressure point on the giga-project question.

Qatar and Kuwait provisioned before they had to

Qatar entered the war with buffers already built, and the sectors most exposed — hospitality, services, real estate — had taken their hit from post-World Cup property oversupply. Christou says Qatar’s banks provisioned for this before the war gave them a reason to.

“Kuwait, on the other hand, looks the most insulated of the four. It has had conservative underwriting, strong deposit growth, and capital well clear of requirements,” Christou adds.

The regulatory divergence matters less than it looks, in Gidoomal’s reading. “The differences [in regulatory measures] are in instrument rather than degree… Every regulator found its banks well-capitalized, adequately provisioned, with enough liquidity,” he says.

What the market is pricing

GCC bank valuations are around 2025 averages, which tells you the market is not “pricing a major deterioration in credit quality,” Gnaba says. UAE sentiment improved through 2Q on a shock handled better than feared.

That pricing has an expiry date attached, and it is the same one the deferrals have. If the UAE’s program lapses without renewal, restructuring requests climb and Stage 2 loans start sliding into Stage 3, the market will have to reprice. Saudi’s version of the test: The absence of a rescue package stays reassuring only while giga-project and contractor risk stays contained.

Christou expects the answer next year. “The real impact across the region will be seen next year in terms of asset quality,” he says.