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Gulf banks navigate turbulent times

25 July 2025

 

Much can change in a year, as GCC banks are finding out. They face a sharply different environment in mid-2025 than they did at the same point last year. In 2024, GCC banks’ immediate challenge was the downward shift in interest rates dictated by the US Federal Reserve, prompting a drop in interest income and forcing lenders to secure other forms of revenue.

This year, the political and economic disruption wrought across much of the world has changed the calculus for regional lenders.

While lower interest income remains an ongoing challenge, a broader mix of issues requires attention, including tighter liquidity, higher cost of funds and the need to continue supporting domestic diversification agendas. 

The good news for GCC banks is that, on the whole, the positives are outweighing the negatives.

According to Kamco Invest research, GCC banking sector bottom-line growth was steady in early 2025, with Q1 2025 witnessing expansion of 8.6% to reach $15.6bn, a record for that quarter.   

This increase came despite a decline in net interest income of 1.7% in year-on year terms, and was mainly led by higher non-interest income, lower operating expenses and a decline in impaired loans.   

Position of strength

Strongly performing Gulf economies over successive years have created favourable conditions for banks, offsetting the impact of lower interest rates. 

“Throughout this period of higher oil prices, GCC banks were building their capital buffers because profitability was good,” says Redmond Ramsdale, head of Middle East bank ratings at Fitch Ratings.

“Asset quality in most of these countries has been improving. So the banks are in quite a good position with the buffers they have built.”

Strongly performing Gulf economies over successive years have created favourable conditions for banks, offsetting the impact of lower interest rates

Despite the economic volatility seen in the first half of 2025, Gulf banks have proved resilient, even if President Donald Trump’s tariffs remain a challenge for US trading partners globally, including those in the Gulf. 

“Tariffs are likely to have limited direct impact on GCC banks. It’s more about what is the importance of tariffs on oil prices. Lower oil prices are negative for the GCC because oil is still the main component of government revenues – and that’s what effectively translates into lending or financing growth for the banks,” says Ramsdale. 

Credit growth is holding up strongly, which in part reflects the resilience of economic diversification programmes in the GCC. 

Demand for credit is also holding up, as is government spending – typically a key determinant of economic confidence, and a driver for non-oil GDP.

The consensus among analysts is that credit growth will remain in the high single-digits for the GCC as a whole, and will be still higher in Saudi Arabia. 

“In Saudi Arabia we forecast that the loan growth will remain strong this year, and will be driven more by corporate lending as projects around Vision 2030 are being implemented — less so by mortgages,” says Mohamed Damak, senior director, financial services at S&P Global. 

According to Damak, mortgages will continue to grow because there is still demand. “But the big story for Saudi banks is the recourse to external funding,” he says. 

“They have been issuing debt on the international capital markets in order to mobilise liquidity to be able to continue to finance their growth, because deposit growth is not sufficient to finance all lending growth.”

This is the backdrop to the extensive issuance being seen in the kingdom and other Gulf markets. Saudi National Bank (SNB) completed the issuance of $1.25bn in Tier 2 US dollar capital notes in June, with order books exceeding $4bn. 

It is not just Saudi banks that are in issuance mode. GCC banks have about $2.2bn in US dollar-denominated Additional Tier 1 (AT1) instruments with first call dates due in 2025, and a further $3.1bn in 2026, according to Fitch Ratings. This comes off a strong year for Gulf bank debt issuance in 2024, when $42bn of issuance was seen – the previous record was in 2020 with about $26bn. 

First-half 2025 issuance stands at $38bn, suggesting this year is going to set a new record. Maturities valued at $16bn are due in 2026, with $13bn due in 2027, a further driver for banks to tap the debt capital market. 

At least three Saudi lenders have issued AT1 dollar-denominated capital Islamic bonds (sukuk) this year as they have moved to take advantage of tighter spreads and strong investor demand. 

Saudi banks – in line with previous years – are driving loan growth, with UAE lenders not far behind. 

“Our forecast for credit growth in Saudi Arabia for this year is between 10% and 12%, which is still very strong growth, and the highest in the region. That is driving quite strong profitability, despite the fact that they are funding this growth with more expensive funding,” says Ramsdale.

The kingdom’s current and savings account deposits are not growing at anywhere near the pace that loans or financing is growing, notes Fitch, so banks are filling that with term deposits or external liabilities.

The higher reliance on foreign funding has led to tighter liquidity. “Loan growth is exceeding deposit growth, so banks need to issue,” says Ramsdale.

Another reason for issuance is the need for dollars, which are being used to fund major government projects, notably in Saudi Arabia, where about 40% of the GCC bank issuance is located.

Shrinking liquidity

The prospect of tightening liquidity, as deposits prove trickier to attract, is not a cause for undue concern. There are ample tools at the central bank’s disposal to manage the situation.

“The Saudi Arabian Monetary Agency still has a lot of [deposits from government-related entities] sitting in its accounts that can be deployed into the banking sector. If liquidity gets too tight, it can do so,” says Ramsdale.

Stress-testing exercises appear to bear this out. According to S&P Global, all GCC banking systems have enough liquidity to sustain funding outflows, with the exception of Qatar, where there is a shortfall of $9bn under its hypothetical stress scenario. This is due to the fact that Qatar starts with a higher external debt compared to all other  regional countries. 

This $9bn is something the authorities can easily absorb, however, as demonstrated by the strong track record of support. 

S&P stress tested the banking systems on three metrics – the outflow of external debt, the potential outflows of local private sector deposits and the implication on the economy and on the asset quality indicators.

The ratings agency looked at the top 45 regional banks. Under the first scenario, the outflow of external debt, 16 of the banks would show losses of around $5bn in cumulative terms, says Damak. 

For the second scenario, 26 out of the top 45 would be loss-making for a total amount of around $30bn. 

“But now, when you compare the $30bn to how much profit these banks have made over the last year – about $60bn – it means that they have the capacity to absorb the problem without any significant impact on capitalisation,” says Damak.

UAE banks’ massive debt external asset position makes them fairly resilient to potential stress-related external capital outflows, notes Damak.

Big banks dominate

At the individual level, the region’s large ‘national champion’ banks continue to dominate banking systems. Some of these institutions have posted impressive early-year performances.  

For example, Al-Rajhi Bank, the largest lender in the GCC by market capitalisation, reported a 34% year-on-year increase in net profit in Q1 2025. It is reaping the benefit of the kingdom’s surging credit demand. Booking healthy profits on the back of strong loan demand, from both corporate and consumer sectors, comes relatively easily in this context.  

However, where loan growth is weaker, banks’ earning performances have been commensurately negatively affected. 

Looking ahead, profitability is expected to be marginally down this year

For Qatar National Bank, which is considered the largest Qatari bank by assets, while Q1 net profit reached $1.2bn, this
was only up by a couple of percentage points compared to the same period last year, indicative of less robust credit growth in Qatar.  

“The largest banks in the GCC – the likes of SNB and Al-Rajhi in Saudi Arabia, First Abu Dhabi Bank and Emirates NBD in the UAE and National Bank of Kuwait and Kuwait Finance House in Kuwait – tend to have around 50%-60% of the total banking system, which gives them an advantage in terms of efficiency, delivery and market access,” says Ashraf Madani, a senior analyst at Moody’s Financial Institutions Group. 

“These banks are highly rated in terms of their standalone and overall deposit ratings and we expect their advantage to continue.” 

Looking ahead, profitability is expected to be marginally down this year, says Madani, reflecting some pressure on the net interest margins because of the lower rates since Q4 last year, and also the expectation that credit costs should normalise compared to the previous year.

One of the big plus-points for Gulf banks is the improvement in asset quality witnessed in the past year, suggesting that Gulf economies’ post-Covid recovery has helped reduce bad loans. 

“We’re seeing non-performing loans heading in the right direction, trending lower, and that’s basically because of the strong performance of borrowers, and the denominator effect, whereby an increase in the overall size of the loans will lower overall ratio,” says Madani.

Other factors supportive of loan quality are regulatory changes in the UAE, which has allowed UAE banks to write off some of the legacy problem loans, another factor that is likely to move the headline non-performing loan ratio down.

Given the political and economic turbulence witnessed in the first half of the year, Gulf bank chiefs will not be minded to make rash predictions about future conditions. Even so, the resilience on display, and the healthy loan appetite, will likely boost confidence that lenders in the region can withstand further headwinds. 

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James Gavin

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    Main image: Haramain high-speed train in Jeddah, Saudi Arabia

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    Yasir Iqbal
  • Middle East becomes a hub as rail networks mature

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    “That project has been on our radar for some time,” says Vaujour. “It is under the umbrella of the Royal Commission for Riyadh City, which is very well organised and structured. That gives the project strength and credibility.”

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    “We are fine with PPPs. We have experience from France, the UK and Spain.”

    While Alstom does not invest directly, it plays a key role in structuring deals. “We are facilitators and advisers,” says Vaujour. 

    “Our job is to accompany the customer, to adjust and iterate with them, and to help find the best solution. PPP is one of the tools in the box – not the simplest one, but one that works.”

    The challenge in the market today is not a lack of opportunity, but deciding where to focus. 

    “Our main problem is not the market; it is how to be selective,” he says. “We have more than enough opportunities to ensure a nice trajectory of growth. The difficulty is to pick our battles and fight for the right ones.”

    The challenge in the market today is not a lack of opportunity, but deciding where to focus

    Shifting focus

    In Africa and Central Asia, Alstom has long-term locomotive and commuter train partnerships that offer years of visibility. In the Gulf, by contrast, the model remains dominated by engineering, procurement and construction-style projects. 

    “It is more big projects, where civil contractors team up with us to deliver metros or airport people movers,” says Vaujour.

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    Interest in high-speed connections between Riyadh, Doha and Kuwait is also growing, although such schemes will depend on electrification. “High-speed rail comes with electrification,” Vaujour notes. “And that means significant investment.”

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    “Hydrogen and battery traction are progressing, but they are still in an early stage,” says Vaujour. “Diesel will continue to dominate freight for some time, because there is no clean technology yet that can deliver that level of power. But for passenger services, we are starting to see progress.”

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    The evolution reflects a wider transformation of the region’s rail sector. “The Middle East has become an established rail hub,” says Vaujour. “It is no longer just about building – it is about operating, maintaining and evolving.” 

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    Colin Foreman