GCC banks well-positioned to withstand trade tensions: S&P Global

S&P Global said that banks in the Gulf Cooperation Council (GCC) are well-equipped to absorb the impact of escalating trade tensions between the US and China, citing their strong liquidity, profitability, and capital buffers.

S&P pointed out that market volatility and rising risk aversion among investors are the most imminent threats. However, GCC banks are expected to manage these pressures effectively, as their investment portfolios typically account for 20% to 25% of total assets.

While the GCC’s direct exports to the US are relatively limited, the indirect repercussions of worsening trade disputes could still be significant, the agency added in a report.

S&P highlighted that the sharp decline in oil prices could weigh on government spending and overall economic activity in the GCC, potentially leading to a rise in non-performing loans. Prolonged weakness in oil prices may also slow growth in both oil and non-oil sectors, placing further pressure on banks’ asset quality indicators. However, the agency expects this impact to be reflected more in banks’ profitability than in solvency.

The report added that capital market volatility remains manageable for banks. Losses are unlikely to happen unless lenders are forced to liquidate certain investments to manage capital outflows, a scenario S&P does not anticipate.

Moreover, the agency projected the US Federal Reserve to cut interest rates only by 25 basis points this year, with GCC central banks expected to follow suit. This move would help support the profitability of regional banks. However, S&P cautioned that a steep decline in interest rates could compress margins and slow loan growth, posing further downside risk to bank earnings.

Amid current market volatility, S&P expected GCC banks to see a slowdown in capital inflows, with some potentially facing capital outflows. Nevertheless, most banking systems in the region are well-prepared to handle hypothetical capital outflows, S&P said.

Regarding Saudi Arabia, the agency stated that the current position of the Kingdom’s banks is comfortable, yet it warned that if they are unable to maintain access to capital markets, their capacity to continue funding Vision 2030 projects could be diminished.

The agency emphasized the importance of regulatory entities response in shaping how the situation evolves—comparable to the role played during the COVID-19 pandemic. It expects regulators to act in a similar fashion if the impact of global trade tensions on GCC economies exceeds current projections.