Emirati banks could face up to USD 59 bn in external funding outflows in a high stress outcome from regional tensions, accounting for 26% of the anticipated USD 221 bn potentially exiting the region under this scenario, S&P Global said in a recent report. However, S&P sees these banks coping due to sufficient external liquidity and government intervention, which together provide a layer of resilience that should help navigate various levels of stress.

This is the case for most GCC banks: S&P’s “stress tests” show that most GCC banks are well-positioned to weather these challenges, even in severe stress scenarios. Thanks to the USD 284 bn in liquid assets held by regional central banks, commercial banks have a buffer to manage significant withdrawals. Regional governments are also likely to step in if asset liquidity is less than forecasted.

#1 Modest + moderate stress: In the modest stress scenario, S&P sees the conflict lasting no more than three months, with minimal disruption to GCC banking. Attacks on regional assets would be short-lived, and credit ratings would remain stable, with no significant outflows or spike in non-performing loans (NPLs). Under the moderate stress scenario, the impact on economic growth, energy prices, and trade routes would be temporary and manageable, with no major funding outflows or asset quality issues in the cards.

#2- Meanwhile, in the high stress scenario — if conflict escalates into prolonged regional instability — external funding outflows could hit USD 221 bn, or roughly 30% of the GCC banking system’s total external liabilities. Even then, banks have adequate external liquidity to handle the drain. However, the impact on asset quality could be more troublesome. Non-resident deposits could see up to 30% outflows, and the stock of NPLs could increase by 30%, or an NPL ratio of 5%. S&P projects that 13 of the top 45 banks in the GCC would suffer losses, with cumulative losses totaling USD 3.3 bn.

#3- Worst-case? The severe stress scenario envisions a full-scale conflict involving regional and global actors including the US and Gulf states. The resulting disruptions would severely impact energy prices, trade, and overall economic stability. S&P projects additional deposit outflows of USD 275 bn from local private sector deposits, with Saudi Arabia and the UAE seeing the most significant impacts due to the size of their banking systems. Despite the doomsday overtones, GCC banks are expected to be capable of weathering the storm due to liquidity and boosts from central banks.

Asset quality would deteriorate further in this worst-case scenario, with NPLs rising by 50%, leading to a cumulative NPL ratio of 7%. More than half of the top 45 banks in the GCC would likely report losses, amounting to USD 24.6 bn in total and some banks would be forced to liquidate portions of their investment portfolios.

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