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Saudi banks could face “manageable” external funding outflows of up to USD 30 bn in a high or severe stress outcome accounting for only 14% of external outflows for GCC banking, S&P Global said in a recent report. External liabilities are concentrated in Qatar, the UAE, and Bahrain’s offshore banking sector.
IN CONTEXT- The report looks at four potential scenarios for how regional tension could impact GCC banks, depending on how far the conflict between Israel, the US, Iran, and regional proxies escalates. The possible outcomes range from modest to severe stress.
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S&P’s stress tests show that most GCC banks are well-positioned to weather these challenges, even in severe stress scenarios. Central banks’ holdings of USD 284 bn in liquid assets mean commercial banks have a buffer to manage significant withdrawals. Regional governments are also likely to step in and shore up banks 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 display 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 the Kingdom 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%. 25 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. Despite this, S&P says GCC banks can still rely on their liquidity reserves and government support to manage these outflows.
