3 factors support the stability of the financial conditions of Gulf banks in 2026

A report expected that the financial conditions of banks would remain Gulfis stable in 2026, supported by significant stability in profitability, supportive asset quality, and strong capitalization.

The report noted two main risks threatening The basic scenariofor stability is the occurrence of adverse geopolitical developments that undermine economic foundations and a significant decline in oil prices.

He explained that the first risk may take the form of a long-term regional conflict, but it is not part of the basic scenario for stability. The second risk may arise from the weakness of the global economy and the large oversupply in global energy markets.

Outlook

The report stated that the outlook is stable to 90% of the credit rating of…"Standard & Poor’s" For Gulf banks, while the outlook is negative for two banks for reasons specific to each of them.

He pointed out that reliance on external financing is increasing in the Gulf countries. The highest levels of external debt in the region are still shared by Bahrain and Qatar, in the form of deposits to non-residents.

Capital flows to the region are expected to remain strong over the next 12 months, while Saudi banks will continue to benefit from international debt markets to raise the financing necessary for the Kingdom’s vision.
2030

Credit Rating of Gulf Banks

The report stated that the average credit rating is "Standard & Poor’s" The long-term outlook for banks in the Gulf countries is ‘A’, as of November 15, 2025, with a slight improvement over last year as a result of raising our credit ratings for banks in Saudi Arabia and the Emirates.

He added that the future outlook for 90% of the credit ratings is stable, and 10% is negative, taking into account the great support provided by the Gulf governments to the majority of the rated banks.

The report ruled out a change in the rating in the near future in light of the declining momentum towards Adopting effective rescue systems.

Lending Growth

The report expected the price of a barrel of oil to stabilize at about $60 in 2026 (Brent crude), indicating that the unweighted average economic growth of the six Gulf states is likely to reach 3.1% in 2026, up from 2.9% in 2025.

It pointed out that banks in Saudi Arabia and the Emirates are expected to continue to benefit from the positive climate. For economic transformation and growth of the non-oil sector. In Saudi Arabia, growth will continue to be driven by lending to companies, supported by the opportunities of the Kingdom’s Vision 2030. In the UAE, lending to individuals, which represents about 27.5% of total lending in the country, as of August 31, 2025, will continue to expand, driven by population growth, positive consumer sentiment, and reduced transaction duration thanks to digital transformation.

The report indicated that although household debt rates have risen at a steady pace in the Gulf states over the past four years, they It remains manageable compared to other emerging markets, especially given the high debt sustainability of households eligible for bank financing.

He explained that in Qatar, the expected increase in gas production is expected to promote headline growth and the country’s strong fiscal and external balances, but is unlikely to create significant growth opportunities for the banking system in the short term.

Banks in Bahrain are expected to face challenges represented by slowing growth due to low oil prices. The decline in oil prices is also expected to affect Kuwait, although it is hoped that the implementation of reforms and investments will support lending growth.

He noted that, for example, the expected mortgage law, if accompanied by other structural reforms, may create new opportunities for the banking system. In the Sultanate of Oman, some non-oil investments and expansion are expected to continue to support the growth of the banking sector. Low interest rates are also expected to support the pace of lending growth in the region.

The US Federal Reserve is expected to reduce interest rates by another 75 basis points between now and the end of 2026, while most central banks in the region are expected to follow the example of the US Federal Reserve in reducing interest rates.

Asset Quality Indicators

According to the report, the combination of the supportive economic environment, write-offs and recovery helped Gulf banks record strong indicators of asset quality.

The non-performing loan ratio for the largest 45 banks decreased to 2.7%, and the provision coverage ratio rose to 155.6%, as of June 30, 2025. The most important thing is that the cost of risk reached its lowest periodic level at 46 basis points.

The report expected that asset quality indicators would remain stable at their current levels unless any unexpected shock occurs, while the cost of risk is expected to range between 50 and 60 basis points in 2026.

Lengthening risks:
According to the report, a large portion of lending remains untested over a full economic cycle. Over the past five years, the 45 largest banks have provided more than $700 billion in net new loans. While there is generally a positive outlook on the lending and underwriting standards adopted by banks, new lending is not far from being affected by the severe economic deterioration.

He expected this to result from a significant slowdown in the global economy leading to a significant decline in oil prices, prompting some regional governments to reduce spending.

He indicated that it is expected that this may also result from a sharp rise in geopolitical or security risks to a level that begins to affect economic activity.

He pointed out that Gulf banks are collectively able to absorb double their current non-performing loans before their losses begin to appear.

He explained that some banks have international operations, especially in Türkiye and Egypt. For Turkey, we expect a decline in asset quality indicators due to consumer loans and credit cards. The creditworthiness of companies could also be affected by the current economic slowdown, coupled with the continued rise in financing costs and the weakness of the Turkish lira.

But the story is different in Egypt, where the credit quality of borrowers, especially small and medium enterprises, is expected to benefit from lower interest rates and improved economic growth.

For Gulf banks, the risk remains confined to a small number of banks, most of which have the financial strength necessary to absorb the additional risks.

Gulf banks also hold a percentage Good origins in liquid formulas. These are generally interbank deposits and deposits at the central bank. In addition, banks tend to keep a similar proportion of assets invested in relatively high-quality instruments that they can buy back when needed.

The report said: "Accordingly, we believe that Gulf banks have sufficient liquid assets to withstand an exit of private sector deposits, which may happen if geopolitical or security risks escalate, but this hypothesis is not within the basic scenario for stability.

An expected slight decline in profitability

The 45 largest banks in the Gulf countries continued, during the first six months of 2025, to show good and stable financial performance, with the average return on assets reaching 1.7%. Higher lending volumes partly offset the slight decline in net interest margin, also helped by stable efficiency ratios and lower risk costs.

By 2026, the report forecasts a slight decline in profitability due to expectations of lower interest rates. While the cost of risks for banks is also expected to return to its usual level, at between 50 and 60 basis points.

He explained that in terms of efficiency, banks are expected to continue spending on digital transformation and cyber risk management. We also expect an increase in the use of artificial intelligence not only in risk management and fraud detection, but also to improve product offers to customers.

He expected that we will witness some mergers in markets crowded with banks or in markets where regulatory authorities encourage mergers, an example of which is Bahrain, Two of the largest banks are currently discussing a potential merger and in other countries, we believe that mergers may occur among smaller banks.

Capitalization Strength

Gulf banks continue to register strong capitalization by international standards, with the average unweighted Tier 1 capital ratio reaching 17% as of June 30, 2025.

This ratio has remained stable over the past five years, but the contribution of hybrid instruments has increased, especially in Saudi banks, where this ratio averaged 22% of Common Equity Registered at June 30, 2025 This is because shareholders and other investors were less willing to inject core capital into banks and more interested in obtaining ongoing, predetermined income from issuing hybrid instruments.

According to the report issued by "Standard & Poor’s"This can also be explained by the underpricing of some of these instruments compared to the banks’ cost of capital. It is expected that the quality of capital will continue to decline.

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