Gulf banks could face domestic deposit outflows of $307 billion if the Middle East conflict deepens, S&P Global Ratings stated in a report.

The agency noted that there has been no evidence of major outflows of foreign or local funding so far, adding that banking systems in the Gulf have remained stable since the conflict began last month. 

However, it cautioned that a prolonged conflict could trigger a shift of funds between banks within the same systems as well as external and domestic funding exits.

S&P’s base case assumes the most intense phase of the US-Israeli war on Iran will last between two to four weeks. In a report dated March 16, it added that spillovers and intermittent security incidents could extend beyond that period.

The war, now in its third week, has disrupted energy markets and transport as it spread across the region, with multiple attacks reported in Dubai and other Gulf states.

The situation has affected banking operations, with some international lenders shutting most UAE client-facing services after Iran’s IRGC threatened attacks on economic centres and banks linked to the US and Israel.

Banks have said they continue to serve clients through digital channels, although disruptions to digital infrastructure have been reported.

Amazon Web Services reported on March 2 that drones struck three of its facilities in the UAE and Bahrain, disrupting cloud and IT services, with some banking customers briefly losing access to online accounts.

S&P noted that some banks have set up data centres and backup facilities outside the region, where permitted by regulators, which helped limit the impact of the strikes.

Under a stress scenario, S&P estimated domestic deposit outflows across the six Gulf Cooperation Council (GCC) banking systems could reach $307 billion based on year-end 2025 figures.

Banks currently hold around $312 billion in cash or at central banks to absorb such outflows, with an additional buffer of about $630 billion available after liquidating investment portfolios at a 20 percent haircut, the agency added.

"Overall, the risk appears manageable," S&P said, adding that four of the six GCC countries are considered highly supportive of their banking systems and that regulators have increased supervision since the conflict began.

It noted that Bahraini retail banks appear more exposed due to a recent rise in external debt.

The UAE central bank has sought to reassure markets, with Governor Khaled Mohamed Balama stating earlier this month that the banking sector has continued to operate normally.

UAE banks have seen growth in credit demand as governments increased spending on sectors including tourism and infrastructure.

The central bank said total assets rose 17.1 percent to 5.34 trillion dirhams ($1.45 trillion) in 2025 from a year earlier, while the loan portfolio expanded nearly 18 percent and deposits increased around 16 percent over the same period.

 

S&P stated that the full impact on loan books will take time to materialise, identifying logistics, transportation, tourism, real estate, retail and hospitality as among the most exposed sectors.

Under a high-stress scenario, assuming either a 50 percent increase in non-performing loans (NPL) or an NPL ratio of seven percent of total loans, cumulative losses across the region’s top 45 banks could reach around $37 billion, it added.

The agency stated that GCC banks are entering the stress period from a position of strength, drawing comparisons with the 2020 COVID-19 shock when regulators introduced measures to absorb loan impairments, and added that a similar response is expected if conditions worsen.

UAE bank shares have recorded double-digit declines across major lenders since the conflict began.