S&P: (Extreme pressure) of regional events may cause Gulf banks to suffer cumulative losses of $24.6 billion

The credit rating agency S&P has developed four scenarios to measure the impact of regional events on Gulf banks, namely: weak, moderate, significant, and severe pressure. The agency identified three risks that banks in the region may be exposed to, according to the continuation of the conflict in the region. These risks include: the exit of non-resident investors and the exit of foreign financing from the region, the slackening of local financing (which, according to the agency, will only happen in the event of exposure to severe pressure), and the increase in default rates on loans from companies and individuals. Based on the scenarios, the agency expects that 13 Gulf banks out of 45 banks included in the agency’s measurement list will record losses in the event of exposure to the scenario of significant pressures, due to regional events, and this number rises to 25 banks in the (extreme pressure) scenario, with cumulative losses reaching $24.6 billion.

Earlier, S&P Global Ratings expected that Gulf banks will continue to perform strongly in 2024, provided that they are not exposed to unexpected challenges. The agency explained that the ratio of non-performing loans recorded 3.2% during the first half of 2024 compared to 3.1% in 2023, while the coverage of provisions for non-performing loans recorded 155.5% compared to 162.8% in the previous year. As for capital adequacy, it recorded 17.1% in the first half of 2024 compared to 17.3% in 2023, while loans to deposits recorded 94.6% compared to 93.9% last year. The return on assets also reached 1.74% compared to 1.65% in 2023, while the cost-to-income ratio was 35.7% compared to 36.9% last year. Looking ahead to 2025, the agency notes that interest rate cuts could squeeze banks’ profit margins, but asset quality is expected to remain generally supportive, helping banks maintain good levels of stability.