Gulf banks could face domestic deposit outflows of $307 billion if the Middle East conflict deepens further, S&P Global Ratings warned this week in a stark assessment of the financial risks building across the six-nation Gulf Cooperation Council. The figure, based on year-end 2025 balance sheet data, represents the ratings agency's estimate of potential outflows under a hypothetical stress scenario in which a prolonged war triggers a broad flight to quality — both within and out of regional banking systems.

STRESS TEST PARAMETERS

The S&P analysis models a scenario in which depositors — both individuals and institutions — shift funds away from banks perceived as more vulnerable, either moving to stronger domestic lenders or withdrawing capital from the region altogether. Under this framework, the combined GCC banking sector could see outflows reaching $307 billion, a figure that would test the liquidity buffers of even the region's best-capitalised institutions.

However, S&P was careful to frame the risk as manageable under current conditions. Banks across the GCC currently hold approximately $312 billion in cash or deposits at central banks — a buffer that roughly matches the estimated outflow risk. Beyond that, the region's lenders hold an additional $630 billion in investment portfolios that could be liquidated, though S&P applied a 20% haircut to reflect the potential for fire-sale discounts in a stress environment. "Overall, the risk appears manageable," the agency concluded.

CREDIT LOSSES COULD HIT $37 BILLION

The deposit analysis is only one dimension of the potential stress. S&P also modelled credit losses under a high-stress scenario that assumes either a 50% increase in non-performing loans or a non-performing loan ratio of 7% of total loans, whichever is greater. Under those conditions, cumulative losses across the region's top 45 banks could reach approximately $37 billion — a significant hit but one that most major institutions could absorb given the capital cushions built up during the high-oil-price years of 2022 to early 2025.

Four of the six GCC countries — Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait — are classified by S&P as "highly supportive" of their banking systems, meaning regulators have both the fiscal capacity and the institutional willingness to backstop lenders if necessary. Regional central banks have stepped up supervisory activities since hostilities began, conducting more frequent liquidity stress tests and maintaining open communication lines with major domestic and foreign banks operating in their jurisdictions.

DEBT ISSUANCE GRINDS TO A HALT

The conflict's impact on Gulf capital markets has been immediate and pronounced. GCC US-dollar bond and sukuk issuance has dropped sharply since the war broke out, reversing what had been strong momentum in the early weeks of 2026, according to Fitch Ratings. Many borrowers have delayed planned deals as heightened uncertainty makes pricing difficult and investor appetite unpredictable. The slowdown matters beyond the region: the GCC accounts for an outsized share of emerging market dollar issuance, and a prolonged freeze could ripple through EM debt markets more broadly.

Despite the issuance pullback, there has been no broad market selloff. GCC credit fundamentals remain strong, with most Fitch-rated sukuk carrying 'A' category ratings and stable outlooks. No defaults have occurred. Sukuk's share of total issuance has reached record highs, driven primarily by Saudi Arabia and the UAE, where governments and corporates continue to prioritise funding diversification. MENA sukuk continue to trade tighter than conventional bonds, supported by robust demand from Islamic banks with limited alternative investment options.

OPERATIONAL DISRUPTIONS MOUNT

Beyond the balance sheet risks, international banks operating in the Gulf are contending with direct operational disruptions. Several major global lenders have tightened security protocols across the region following Iranian warnings that financial institutions linked to the United States and Israel could become targets. HSBC has closed all branches in Qatar until further notice. Citigroup instructed Dubai staff to work remotely and evacuated three buildings as a precaution. Goldman Sachs now requires employees to obtain approval before entering Middle Eastern offices, and Standard Chartered asked staff near the Dubai International Financial Centre to leave earlier this week.

The operational disruptions come at a particularly sensitive time. Asian banks, which had been expanding their Middle East lending operations aggressively, have begun pulling back. A major Singaporean bank shelved its Middle East expansion plans for 2026, while private conversations at a recent Asia Pacific Loan Market Association meeting were dominated by the reversal in enthusiasm for Gulf exposure — a sharp contrast to the optimism that prevailed when the same association held its first-ever conference in Dubai just weeks earlier.