Moody's expects short-term, marginal effects on Gulf banks credit ratings

The Middle East conflict is expected to have short-term, marginal effects on Gulf banks’ credit ratings, given their strong liquidity and capital buffers, said Moody's Investors Service in its baseline scenario.

The agency expects the conflict to be relatively brief, with the Strait of Hormuz closed for a few weeks, no major damage to production facilities or infrastructure, and a likely resumption of regional air traffic.

Moody’s noted that prolonged disruption to energy trade flows or escalation of attacks could increase risks to banks by weakening investor confidence and deteriorating macroeconomic conditions.

The agency highlighted that the primary risk transmission channel is operational and liquidity risks for banks.

Currently, despite some temporary disruptions in online banking platforms due to damage to facilities, banks maintain business continuity plans that ensure their core banking systems continue to operate fully for customers without interruption.

The secondary risk channel is the deterioration of the banking operating environment, which could undermine asset quality and profitability in GCC banks, potentially pressuring capital buffers and negatively affecting credit ratings.

Finally, the tertiary risk channel lies in the close linkages between Gulf banks and sovereign entities, with the influence of regional governments reflected in banks’ balance sheets as major borrowers, depositors, and shareholders.