The resilience of Gulf banking systems in the second half of 2026 will depend largely on whether the ceasefire between the United States and Iran evolves into a durable peace agreement, according to a new assessment by Fitch Ratings.
The ratings agency said the credit strength of banks across the Gulf Cooperation Council (GCC) has so far withstood the geopolitical turmoil. However, the outlook remains closely tied to regional stability, with a prolonged ceasefire seen as the most important factor in preventing broader financial stress.
A Memorandum of Understanding signed on June 17 extended the ceasefire first agreed on April 8 and established an initial 60-day framework for negotiations aimed at securing a permanent settlement. The agreement also commits Iran to making efforts to facilitate the reopening of the Strait of Hormuz for commercial shipping.
Fitch believes the agreement reduces the probability of severe downside scenarios, including a prolonged disruption of maritime trade through the strategic waterway. Even so, the agency cautioned that isolated military exchanges after the signing underscore the fragile nature of the truce and leave the long-term outlook uncertain.
Assuming large-scale hostilities do not resume or critical energy infrastructure across the Gulf avoids lasting damage, Fitch expects GCC banks to retain their financial stability through the remainder of the year.
Rather than facing immediate balance-sheet pressures, banks are expected to feel the indirect economic effects of the conflict. Slower business activity across the non-oil economy is forecast to weigh on credit demand, profitability and asset quality.
Fitch projects non-oil GDP contractions in three of the six GCC economies during 2026, while Oman is expected to be the only member state posting stronger non-oil growth than it achieved last year. The softer economic environment is likely to curb lending growth, modestly increase impaired loans and narrow banking sector earnings.
Reflecting these concerns, Fitch recently revised its outlook for Middle East banks to “deteriorating” from “neutral,” citing the broader consequences of the US-Iran conflict. Nevertheless, the agency maintains that Gulf banking systems possess sufficient financial buffers to absorb near-term risks.
Most bank credit ratings across the region continue to be underpinned by expectations of government support. Since the conflict intensified, ratings actions have been limited, with the primary adjustment involving Rating Watch Negative placements for certain Qatari banks following similar action on the country’s sovereign rating.
Fitch identified asset quality and liquidity as the principal channels through which geopolitical tensions could affect lenders.
Businesses operating in infrastructure, aviation, logistics, transport, tourism and real estate may experience weaker financial performance if economic conditions soften further. However, banks’ exposure to tourism remains relatively limited, while lending to small and medium-sized enterprises represents only a modest portion of total loan portfolios, reducing broader credit risks.
The agency also noted that a sharper-than-expected correction in Dubai’s real estate market could create additional pressure on smaller UAE lenders with significant property-related lending.
On the funding side, Fitch described GCC banks as being in a position of strength. The region’s lenders rely predominantly on customer deposits, with government and government-linked entities accounting for roughly one-fifth to one-third of total deposits, providing a stable funding base.
Capital market access has also proven more resilient than initially anticipated. After a brief slowdown in debt issuance during the conflict, governments and financial institutions have returned to the market, including through subordinated bond offerings.
Fitch added that banks across the Gulf maintain solid reserve buffers, while regulatory support measures introduced by regional authorities are viewed as precautionary rather than emergency responses. These temporary relief measures are designed to reinforce confidence and prevent short-term deposit volatility from spilling over into lending activity.
The agency expects such support mechanisms to be withdrawn once geopolitical conditions stabilise. Even then, it cautioned that elevated security risks across the Gulf could continue to influence investor confidence, business sentiment and long-term economic trends well beyond the current conflict.
