Middle Eastern Banks: Tested By Conflict

By Mariana Villalba, CFA

The continued battle in Iran and its growth throughout the area to focus on GCC nations unfolded following a interval of debt-issuance progress within the area, particularly from the financials sector.

Because the battle continues, we consider a deeper dive into GCC financials is warranted. Beneath, we take a better take a look at GCC banks, which symbolize about one-tenth of the J.P. Morgan CEMBI Broad Diversified’s^[1] market capitalization.

GCC Diversification From Oil to Credit score

Over the previous few years, Gulf GCC nations have been actively pursuing financial diversification away from the hydrocarbon sector and pursuing social transformation by attracting international human and monetary capital into the area.

That is evidenced by the efficiency of non-hydrocarbon financial progress, which has outperformed actual gross home product (GDP) progress lately, because the chart beneath exhibits.

Actual GDP Progress of the Non-Oil Economic system in GCC States (Yr-Over-Yr Change)

Supply: IMF Database: Center East and Central Asia Regional Financial Outlook.

Elevated public debt issuance has accompanied financial diversification. The primary chart beneath exhibits the Center East’s share of rising markets (EM) company main debt issuance since 2017.

The second chart exhibits that as of December 2025, the Center East made up practically one-fifth of the J.P. Morgan CEMBI Broad Diversified’s market capitalization, of which GCC nations represented greater than 80%. The financials sector accounted for about half of the area’s publicity.

EM Company Debt Issuance

Supply: J.P. Morgan, as of December 2025. Universe is the J.P. Morgan CEMBI Broad Diversified. *Excludes 100% government-owned entities.

Regional Breakdown of the Index (Share of Market Capitalization)

Supply: J.P. Morgan, as of December 31, 2025. Universe is the J.P. Morgan CEMBI Broad Diversified.

Elevated debt issuance from the financials sector has pushed the area’s issuance progress. In consequence, the share of GCC financials within the index has risen by greater than 2.5 share factors to just about 9% since 2021, as proven within the chart beneath. This progress was primarily pushed by issuers in Saudi Arabia, UAE, and Kuwait.

GCC Market Cap (Financials vs. Different GCC Non-Monetary Corporates)

Supply: J.P. Morgan, as of December 31, 2025. Universe is the J.P. Morgan CEMBI Broad Diversified.

GCC Financials Breakdown by Nation (Share of the Index)

Supply: J.P. Morgan, as of December 31, 2025. Universe is the J.P. Morgan CEMBI Broad Diversified.

How the Battle Might Have an effect on GCC Banks

After years of stability that fostered a supportive working atmosphere, the continued battle in Iran and its growth throughout the area into GCC nations could pose challenges to the pillars of the area’s progress technique and to banks within the area.

In our view, there are three principal channels by means of which the battle could affect banks within the area. The diploma of affect could differ relying on every financial institution’s enterprise mannequin, stage of diversification, and total technique.

Mortgage Progress. We consider probably the most speedy and direct affect of the battle on the banking sector is its destructive affect on financial exercise on account of bodily disruption, infrastructure destruction, and decrease shopper and company confidence.

This may occasionally affect banks’ lending progress and doubtlessly income era. From a credit score investor’s perspective, nonetheless, a slowdown in lending progress could be optimistic from a capital perspective, though there are different elements that might offset that optimistic impact.

Funding. That is one other potential channel of affect, each by way of liquidity availability and price of funding. As power costs have risen, world charges have risen and monetary situations have tightened.

Each institutional traders and depositors could change into extra risk-averse and require the next premium to offer funding to banks within the area. Moreover, the financial disruption attributable to the battle would possibly cut back corporations’ money flows and therefore the quantity of deposits within the monetary system.

Asset High quality. A slowdown in financial exercise and harm to bodily infrastructure could weaken the creditworthiness of debtors and affect their skill to repay their money owed, cut back the worth of collateral, and even result in defaults. This might entail extra provisioning necessities from banks and improve the stability of non-performing loans (NPLs).

Whereas dangers abound and the extent of uncertainty is excessive, we consider GCC banks may gain advantage from strengths that permit them to navigate this turbulent interval comparatively effectively from a credit score perspective. These embody robust stability sheets, favorable possession constructions, and a supportive regulatory atmosphere.

Robust Steadiness Sheets

GCC banks got here to the battle able of basic energy. The median NPL protection of banks within the area was 150%, based on our evaluation, which signifies that there’s room to soak up some asset-quality deterioration.

On the identical time, banks maintained a median capital buffer of greater than 400 foundation factors above minimal necessities throughout the GCC,^[2] and greater than 300 foundation factors when excluding Saudi Arabia. That ought to alleviate considerations about solvency, even within the absence of extraordinary assist.

One caveat pertains to dispersion. Particular person banks could have weaker credit score fundamentals than the combination knowledge suggests and therefore be extra weak to shocks. Nonetheless, these banks symbolize a smaller a part of our funding universe.

Supportive Possession Buildings

Most banks within the area have authorities possession, typically by means of controlling stakes. In flip, the creditworthiness of most GCC sovereigns could be very robust, as evidenced by excessive credit score rankings, comparatively low debt ranges, and excessive international change reserves.

Mixed, these elements translate into a robust skill and willingness to assist native banks. That is typically explicitly mirrored in banks’ credit score rankings, with many benefiting from ranking uplifts instantly on account of their possession construction.

Supportive Regulatory Surroundings

Along with the expectations of assist embedded within the credit standing companies’ assessments we described above, financial institution regulators and central banks within the area have a monitor file of offering assist to the banking sector in occasions of stress. This occurred through the COVID-19 interval.

Following the beginning of the Iran battle, regulators within the UAE, Qatar, and Kuwait got here out with measures of assist and/or reduction for his or her respective banking sectors, with the UAE offering probably the most complete plan.

These measures embody, amongst others, 1) momentary leisure of liquidity and capital necessities; 2) provision for extra liquidity services; 3) momentary flexibility for bad-loan recognition; 4) momentary easing of reserve necessities; and 5) cost reduction for debtors.

Whereas we aren’t downplaying the financial and human price of the battle, that are vital and shouldn’t be uncared for, we stay comfy with the basics of GCC banks, which ought to assist relative resilience by means of this turbulent interval.

^[1] The J.P. Morgan CEMBI Broad Diversified is a extensively used benchmark that tracks the efficiency of U.S. dollar-denominated company bonds issued by corporations in EMs.

^[2] Doesn’t think about pillar 2 necessities relevant in Saudi Arabia, which aren’t publicly disclosed.

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Editor’s Be aware: The abstract bullets for this text had been chosen by Looking for Alpha editors.