UAE banks set for stable 2026 amid geopolitical, oil-price risks

26/11/2025 03:23 AST

GCC banks are heading into 2026 with stable credit fundamentals, strong capital buffers and resilient profitability, according to S&P Global Ratings, which also cautions that geopolitical tensions and oil-price volatility remain the biggest risks to the sector.

In a comprehensive new assessment, S&P says that 90 per cent of bank ratings across the Gulf carry a stable outlook - reflecting the region's solid economic footing and conservative banking frameworks.

S&P Global Ratings analysts Mohamed Damak and Tatjana Lescova said the region's lenders are entering the new year with "broadly stable profitability, supportive asset quality and strong capitalization," underlining the sector's ability to withstand shocks. "Our base case assumes no major geopolitical eruption or a sharp and prolonged fall in oil prices," Damak said, noting that the stability of Gulf banks will depend on how effectively they navigate these external risks.

The ratings agency stresses that the two biggest downside scenarios involve a severe regional conflict affecting macroeconomic conditions, or a sharp drop in oil prices resulting from a global economic slowdown and oversupply in energy markets. Lescova said, "Event risks remain a factor for the GCC. While recent geopolitical incidents - including the 2025 attacks on Qatar - were short-lived, the impact of any future escalation will depend on its duration, intensity and implications for oil flows, investor sentiment and financial markets."

Across the Gulf, external funding needs are rising. Bahrain and Qatar still have the region's highest levels of external debt through non-resident deposits, while Saudi banks are expected to continue tapping international debt markets to support the financing needs of Vision 2030 megaprojects. Despite these pressures, the region continues to attract strong capital inflows, supported by high oil revenues and continued diversification plans.

S&P's average long-term rating for GCC banks is A-, slightly higher than last year after upgrades to several large banks in Saudi Arabia and the UAE. This reflects improving operating conditions and government support, which remains a key component of bank creditworthiness across the Gulf.

For the UAE, the ratings outlook is particularly buoyant. S&P expects the country's banks to continue benefiting from rapid non-oil economic expansion, strong population growth and robust demand for credit, particularly in consumer lending. Retail credit represented about 27.5 per cent of total UAE lending as of August 2025. Damak notes that the UAE's digital transformation - especially in loan processing, risk analysis and customer onboarding - has helped accelerate retail lending while keeping cost structures under control.

Economic activity across the Gulf is projected to strengthen. S&P forecasts Brent crude to stabilise at about US$60 per barrel in 2026 and estimates average real GDP growth for the six GCC states at 3.1 per cent. The UAE is expected to outperform this average, supported by continued growth in tourism, real estate, trade and advanced technology sectors. Independent indicators reinforce this upbeat outlook: the UAE Purchasing Managers' Index has consistently stayed above 55, signalling expansion in private-sector activity, while the country recorded one of the fastest population growth rates globally in 2024-2025.

Asset quality across GCC banks has significantly improved. As of June 2025, the non-performing loan ratio for the top 45 banks in the region fell to 2.7 per cent, while loan-loss provision coverage rose to 155.6 per cent. The cost of risk declined to a cyclical low of 46 basis points, helped by recoveries, write-offs and stable operating environments. S&P expects asset-quality metrics to remain broadly steady this year, barring a major shock. For 2026, the cost of risk is projected to settle between 50 and 60 basis points.

However, S&P warns of "latent risks". Banks have extended more than $700 billion in net new loans over the past five years - exposing them to credit risks that remain untested through a full economic cycle. A global downturn severely hitting oil prices could force governments to curb spending, potentially pressuring corporate borrowers. In addition, GCC banks with exposures in Türkiye may face rising credit-card and personal-loan defaults as the Turkish economy slows and inflationary pressures persist. Conversely, exposures to Egypt could benefit from falling interest rates and improved SME creditworthiness.

Capitalisation remains a key strength. Banks in the GCC report an average Tier-1 capital ratio of 17 per cent, among the strongest globally. While hybrid instruments have increased - particularly in Saudi Arabia, where they reached 22 per cent of common equity - the overall quality of capital remains solid. S&P does not expect hybridisation to meaningfully weaken sector-wide stability in the near term.

For UAE banks, the message from S&P is clear: the sector is well-capitalised, profitable and benefiting from robust non-oil economic growth. Yet the coming year will require vigilance. As Lescova puts it, "The fundamentals are strong, but event risk is an ever-present factor in the Gulf. Banks that maintain prudent underwriting and strong liquidity will be best positioned to navigate any turbulence ahead."

Khaleej Times