How Gulf banks are absorbing Iran war shocks

Despite nearly five months of war in Iran and the broader Middle East, Gulf banks have continued to post strong earnings, with analysts noting that lenders' strong position at the start of the conflict has so far helped them withstand the economic fallout.

On Thursday, Abu Dhabi Commercial Bank reported a 34% annual jump, to 3.37 billion dirhams ($920 million), in its second-quarter profit, while the First Abu Dhabi Bank (FAB), the UAE's largest lender by assets, posted a 4% increase, to 5.72 billion dirhams.

Emirates NBD Bank saw a 2.2% annual rise in Q2 profit, to 6.44 billion dirhams ($1.73 billion).

In Saudi Arabia, Al Rajhi Bank posted a 14% jump in profit, to 7.01 billion Saudi riyals ($1.89 billion), for the period between April 1 and June 30. The Saudi National Bank reported a 7.6% increase, to 6.61 billion riyals ($1.78 billion), while Saudi Awwal Bank's profit rose 9.6%, to 2.3 billion riyals ($621 million). Bank Albilad posted a 3.4% increase in profit, to 791.6 million riyals ($213 million).

Resilience tested

Gulf banks have faced challenging financial conditions since Israel and the United States attacked Iran on Feb. 28, triggering the ongoing war now spread across the Middle East. The conflict has included Iranian attacks on Gulf neighbors and severe disruption to shipping through the Strait of Hormuz, a strategic waterway that in peacetime handled around a fifth of global oil and liquefied natural gas trade.

On June 17, the US-based Fitch Ratings agency revised its outlook on the Middle Eastern banking sector from "neutral" to "deteriorating," citing the prolonged Iran conflict. Amin Sakhri, director of financial institutions at Fitch Ratings, told Al-Monitor the decision reflected weakening assets in key economic sectors, including contracting, hospitality, real estate and tourism, because of the war.

Fitch also warned the conflict is expected to slow loan growth as weaker business and consumer confidence dampens borrowing demand. It also cautioned that banks could generate less fee income as trade finance, card spending and capital markets activity slows.

Middle Eastern banks are facing higher funding costs as access to international capital markets becomes more expensive and selective, Sakhri said.

Despite those concerns, second-quarter earnings suggest that Gulf banks remain resilient for the time being. Badis Shubailat, vice president at Moody's Ratings, pointed to lenders entering the conflict from a position of strength after several years of improving fundamentals.

"This is owed to a pre-conflict three-year period of benign operating conditions in the Gulf with structural reforms and strong non-oil activity during which GCC banks saw their standalone credit fundamentals improve further on top of already strong solvency and liquidity profiles," Shubailat told Al-Monitor. "Q2 earnings continue to show unabated underlying banking activity with sustained loan growth around non-oil economic diversification, resilient margins, strong fee income and disciplined cost management, with profits underpinned by broad-based franchise momentum."

Strong fundamentals

Elevated interest rates have also helped shield bank profitability from the impact of the conflict, according to Azad Zangana, head of GCC macroeconomic analysis at Oxford Economics. Because Gulf currencies are largely pegged to the US dollar, central banks across the region have kept interest rates between 3.5% and 4.35%, supporting banks' lending margins.

“We expected disruption to have a more meaningful impact on flows in Q2, but profits didn't take a significant hit, especially while interest rates remain elevated,” Zangana told Al-Monitor.

“If housing markets take a hit, we might see a rise in non-performing loans, which would impact profits, but most markets have been reasonably stable given the current situation,” he added.

Higher oil prices have also helped support Gulf banks by boosting government revenues, public spending and corporate activity. On Thursday, Brent crude climbed above $100 a barrel for the first time since May following Houthi attacks on Saudi oil tankers in the Red Sea. Brent peaked at nearly $115 in early May.

Sakhri said oil prices remain a key factor in Gulf bank performance.

"We forecast an oil price of $87 per barrel in 2026, which means it’ll remain above most GCC countries break-even oil price for the whole year. This is a strong positive for the sovereign strength and economic conditions for banks overall," said Sakhri.

Shubailat remarked that higher oil prices have helped sustain government spending and corporate liquidity, though the resilience of Gulf banks has been driven primarily by strong balance sheet growth, diversified income streams and healthy funding conditions.

"We expect solvency pressure for GCC banks over the medium-term, and the degree of intensity clearly hinges upon the duration of the conflict," Shubailat added. "In this regard, we see that dented sentiment across confidence-sensitive non-oil sectors will hurt asset quality and profitability, but this is manageable given banks hold ample shock absorption buffers to withstand potential loan losses."