S&P’s latest report highlights a stable outlook for GCC banks in 2026 on the surface.
Yet below the economic forecasting, there remains several downside risks for Gulf economies, foremost among them the threat of a sharp and prolonged decline in oil prices if oil supply sustains it’s low prices subject to global demand, Fed Rate cuts, and non-OPEC output.
The question now is whether S&P is underestimating the probability of such a sustained price fall.
Current assumptions place Brent crude at about $60 per barrel in 2026 and $65 from 2027 onward, supporting expectations for 3.1% unweighted average GDP growth in 2026, compared with 2.9% in 2025.
According to Mohamed Damak, Global Head of Islamic Finance at S&P Global Rating: “We assumed that oil prices will remain at around $60/BBL for brent (2026) and $65 (2027) whilst we anticipate unweighted average economic growth of 3.1% (2026) marking a 0.2% uptick from 2025.
Mohamed Damak made clear, if oil prices were to drop significantly compared to our expectations, this could “affect economic growth, government spending, as well as corporate and consumer spending. This would change the operating environment for banks and cause negative implications on their asset quality indicators.”
A significant drop below these forecasts would weigh on economic growth, government expenditure, and corporate and consumer activity ultimately reshaping the banking environment through pressure on asset quality and profitability.
Banks Under Negative Outlooks
Two banks in the GCC currently hold negative outlooks due to institution-specific factors
- Sharjah Islamic Bank (SIB) – The negative outlook reflects increasing pressure on capitalisation, driven by the bank’s rapid growth strategy.
- Kuwait Finance House Bahrain (KFHB) – The outlook stems from macroeconomic conditions in Bahrain, rather than internal operational weaknesses.
Damuk made clear for SIB, this is related to increasing pressures on the bank’s capitalisation due to rapid growth strategy whilst KFHB’s issues are down to Bahrain’s internal economy.
Bahrain’s Debt Burden vs. Oman’s Fiscal Turnaround
Although Bahrain and Qatar maintain the highest government debt levels in the GCC, Bahrain faces more acute fiscal strain, underscored by its recent S&P credit-rating downgrade.
Oman offers a contrasting example: despite having lower oil production, it has implemented structural reforms, including GRE restructuring and fiscal consolidation, while also using surpluses from the favourable 2022-2023 oil cycle to rapidly reduce debt.
Damak noted Oman’s combination of structural reforms: specifically, GRE reforms and fiscal consolidation. Using fiscal surpluses from favourable oil prices (2022-2023) rapidly deleveraged net debt levels, interest costs, and refinancing pressures which has helped the country’s credit rating.
This approach has helped lower net debt, reduce interest costs, alleviate refinancing pressures, and strengthen the country’s overall credit profile.
Why UAE, Kuwait, and Oman Maintain Strong External Positions?
The UAE, Kuwait, and Oman continue to hold strong contingency measures irrespective of their current credit scores.
Abu Dhabi, Kuwait, and Muscat have strong net external asset positions, supported by banks whose external assets exceed their external liabilities.
Mohamed Damak notes that banks in these systems have higher assets – mostly interbank and investments – outside their home countries compared to their external debt. This is due to a surplus of funding, explained by low loan to deposit ratios, low loan leverage, lower growth of lending that banks are deploying outside their home countries.
As a rule of thumb, GCC banks have a “conservative risk appetite when it comes to the risk of the instruments in which they invest,” he said.
This is largely due to persistent funding surpluses, driven by low loan-to-deposit ratios, modest credit growth relative to deposits, and surplus liquidity that banks deploy abroad.
GCC Banking in 2026
Under stable oil conditions, GCC banks remain fundamentally strong: highly liquid, well-funded, and conservatively managed.
Yet the sector’s resilience hinges on the price of oil more than any other variable.
A sharp, prolonged drop below S&P’s forecast would be the single most material downside risk, with broad implications for growth, spending, asset quality, and credit trends across the region.
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