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What would an escalation of the war in the Middle East mean for GCC banks?

Hypothetical stress test shows GCC lenders can handle disruptions

Published: Tue 22 Oct 2024, 8:00 AM

Updated: Mon 21 Oct 2024, 10:16 PM

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Despite the current Middle East crisis showing no signs of slowing down, banks in the Gulf Cooperation Council (GCC) are unlikely to be heavily affected, a study shows.

S&P Global conducted a hypothetical stress test on the region’s banks to see how the lenders would be impacted in the event of a prolonged war.


“We continue to assume a protracted, direct Israel/US-Iran conflict will not emerge. However, the recent further cycle of escalation means we now think it is likely that the conflict will persist into 2025, with a higher potential for developments that could weigh on regional sovereign and banks credit ratings,” the ratings agency said in a report.

S&P outlined four scenarios ­— from modest to severe stress — on how the current regional stress level could evolve and what implication this could have on banking systems in the GCC. “Under high and severe stress, banks appear capable of handling potential funding outflows by using their liquid assets. Government support could be necessary if assets are less liquid than we expect. If asset quality stress is as severe as we project, many of the top 45 banks in the region could display losses,” S&P noted.


According to S&P, the risk could materialize in the form of:

- Outflows of foreign funding, with non-resident investors exiting the GCC region as risks increase;

- Outflows of local funding, although we assume that this would materialize only in the case of severe stress, as seen during the Gulf War over 1990-1991; and

- A spike in default rates among banks’ corporates and retail clients as the geopolitical instability affects regional economies.

Under S&P’s standardised assumptions, external funding outflows could reach about $221 billion, which translates into about 30% of the tested systems’ cumulative external liabilities. “That said, we think banks have sufficient external liquidity to cover these outflows in most cases. In the severe stress scenario, we assume a further $275 billion in deposit outflows,” S&P said in its report.

S&P said that under its asset quality deterioration scenarios, 13 of the top 45 banks in the GCC region are likely to display losses under the high stress scenario, based on banks’ annualised reported net income as of June 30, 2024. “This number increases to 25 for the severe stress scenario, with cumulative losses reaching $24.6 billion,” the ratings agency said.

S&P believes that most banking systems can manage these outflows by liquidating their external assets, with only Qatar showing a negligible deficit. “In our view, this deficit is very manageable, given the Qatari government’s track record of supporting banks. We note that the banking system in the UAE stands out in terms of external assets accumulated over the past few years,” S&P said.

Banks may need to liquidate some of their investment portfolios or park them at central banks against liquidity to ride out withdrawals, the agency said. “Overall, the risk appears manageable. After liquidating their investment books with our calibrated haircut, banks will still have about $264 billion that they can deploy.

The results of S&P’s hypothetical stress test show that most banking systems will be resilient if regional conflicts escalate and investor confidence declines. “However, it is important to note that the potential outcomes of the current situation are hard to predict and will depend on the actual outflows and asset liquidity. Of the six countries in our sample, we classify the governments of Kuwait, Qatar, Saudi Arabia, and the UAE as highly supportive toward their banking systems. This means we expect banks in these countries will receive extraordinary government support if necessary,” S&P said.



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