Gulf banks could encounter significant deposit outflows totaling $307 billion if the ongoing Middle East conflict escalates further, according to a recent report by S&P Global Ratings.
The assessment highlights potential risks amid the U.S.-Israeli war on Iran, now in its third week with no signs of resolution. Despite the tensions, Gulf banking systems have demonstrated resilience so far, with no major evidence of foreign or domestic funding flight observed since the conflict began last month.
Resilience Amid Current Tensions
S&P noted that Gulf banks have held firm against initial pressures from the war, which has disrupted energy markets and regional transport.
Some international lenders temporarily scaled back UAE client-facing operations following threats from Iran’s IRGC targeting economic centers and institutions linked to the U.S. and Israel.
However, services have continued uninterrupted through digital channels, even as cloud infrastructure faced disruptions from reported drone strikes on facilities in the UAE and Bahrain.
Stress Scenario and Buffers
In a hypothetical stress test based on year-end 2025 data, domestic deposit outflows across the six GCC banking systems could hit $307 billion.
Banks maintain around $312 billion in cash or at central banks to cover such scenarios, plus an additional $630 billion buffer from liquidating investments (assuming a 20% haircut). S&P described the overall risk as “manageable,” pointing to strong regulatory support in four GCC countries and heightened supervision since hostilities started. Bahraini retail banks appear relatively more vulnerable due to elevated external debt.
Sector Impacts and Outlook
The conflict is expected to affect loan books over time, particularly in logistics, transportation, tourism, real estate, retail, and hospitality. Under a high-stress case with sharply rising non-performing loans, cumulative losses for the region’s top 45 banks could reach about $37 billion.
Gulf banks enter this period from a position of strength, similar to their handling of the 2020 COVID-19 crisis, where regulators provided flexibility to absorb impairments.
UAE banking assets grew robustly in 2025, with total assets up 17.1% to 5.34 trillion dirhams, loans expanding nearly 18%, and deposits rising around 16%.