UAE banks well-positioned to cope with outflows amid rising geopolitical risks

The UAE banking sector remains well-positioned to cope with outflows despite a potential escalation in the region, according to leading provider of credit ratings and market data S&P Global. 

According to its latest report, banks in the UAE, Kuwait, and Oman continue to possess strong net external asset positions, making them well positioned to cope with outflows under a severe case of geopolitical upheavals. Saudi banks also are capable of enduring outflows, despite the fact that its external debt is rising rapidly.

Meanwhile, Qatari and Bahraini banks are predicted to take a shortfall, with the latter potentially requiring domestic or regional support. As per S&P, banks' external liquidity can absorb hypothetical outflows without government or external support in all countries except Bahrain and Qatar.

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Geopolitical escalations

S&P Global said it expects the credit impact of a potential escalation between the United States and Iran — as the former continues touting with nuclear threats — would be similar in scale and duration to the events in June 2025, when Iran attacked Qatar’s Al Udeid Air Base in retaliation for American strikes.

Banks in the Gulf are vulnerable to external debt outflows amid regional tensions, and have remained high-risk since S&P Global’s first “stress test” in 2023. This especially rings true in the event of a prolonged conflict involving both regional and non-regional actors and sustained, wide-ranging attacks.

‘Worst-case scenario’

Bahraini and Qatari banks are the most vulnerable should tensions escalate into a full-blown regional war. S&P analysis predicts that Bahraini banks could face an absolute funding shortfall of $1.9 billion (Dh7 billion), as of year-end 2025, compared with a surplus of $3.3 billion (Dh12 billion) as of year-end 2024, accounting for 8 per cent of external assets after assumed haircuts.

Similarly, Qatari banks are likely to face funding shortfall under a worst-case scenario. However, this potential shortfall has reduced to $4.4 billion as of year-end 2025 — from $7.4 billion as of year-end 2024 —and would likely be covered by the government, given its strong track record of support during times of stress.

S&P’s average long-term rating on banks in the GCC region was 'A-' as of December 31, 2025. As of the same date, 95 per cent of its rating outlooks were stable and 5 per cent were negative. The rating on Bahrain ('B/Stable/B') remains the weakest in the GCC region.