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 an assessment of banks 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.

S&P said it had found "no evidence of major outflows of foreign or local funding so far." 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, lenders could sell investment portfolios, and even after a 20% haircut to reflect potential fire-sale discounts, this would lift the total liquidity available to deploy to about $630 billion. "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 well below the roughly $66 billion in combined annual profit those banks generate.

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 S&P expects them to provide extraordinary support to their banks if conditions worsen. Regulators across the region have intensified supervision since the conflict began, closely monitoring liquidity, capital flows and operational continuity.

DEBT ISSUANCE SLOWS SHARPLY

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 deals have been put on hold amid uncertainty and market volatility, Fitch said. The GCC accounts for about 40% of emerging-market US-dollar debt issuance in 2026, excluding China.

Despite the issuance pullback, there has been no broad market selloff. GCC credit fundamentals remain strong, with about 84% of Fitch-rated GCC sukuk rated investment grade and 90% of issuers on Stable Outlooks. Fitch recorded no defaults as of end-2025. Sukuk rose to a record 41% share of GCC debt capital market volumes, with Saudi Arabia and the UAE making up the majority of GCC debt outstanding. MENA sukuk continue to trade tighter than conventional bonds, reflecting sustained and broader demand, including from Islamic banks.

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 last week.

Asian banks, which had been expanding their Gulf lending, have paused that drive because of mounting risks from the war, Bloomberg reported.