The Gulf economies have also predicted strong economic growth, with a 3% growth forecast for 2025 and 4.1% for 2026. This has been made possible by strategic infrastructure spending, economic diversification, and the expansion of private sector activity.
A recently published EY GCC Banking Sector Outlook report showed that Gulf Banks recorded stronger profits and a robust balance sheet in the first half of this year, despite lower interest rates putting pressure on lending margins.
Higher non-interest income and stricter cost control regulations helped average return on equity jump to 13.2%. The cost-to-income ratio fell to 32%, suggesting improved operating efficiency. Non-performing assets dropped from 2.8% last year to 2.4% this year. This shows that the asset quality of the GCC banks is on an improving trend.
The Gulf economies have also predicted strong economic growth, with a 3% growth forecast for 2025 and 4.1% for 2026. This has been made possible by strategic infrastructure spending, economic diversification, and the expansion of private sector activity. While the global economy has been suffering from a post-pandemic slowdown, accelerated by tariff and counter-tariff uncertainty and geopolitical tensions, despite political instability in the region, GCC countries are flagging a good growth rate and overall positive macroeconomic activity.
The Kamco Invest report also suggested that GCC-listed banks earned a record $16.2 billion in net profit in the second quarter of this year, as increasing revenues and efficiency gains offset rising impairment charges. Financial analysts are certain that the banks are well-equipped to deal with short-term challenges while pursuing long-term opportunities for growth, as they have strong capital buffers, better efficiency and healthy balance sheets.
The banking sector’s average Tier 1 capital ratio was 17.5% and the capital adequacy ratio was 18.9%, further proving that these banks can remain largely unaffected by economic shocks.
Along with studying the improvement and achievements of the GCC banks, the report also highlighted the sector’s emerging concerns. Interest rate cuts caused net interest margins to decline from 2.8% in the first half of 2024 to 2.6%. Furthermore, as the loan-to-deposit ratio increased to 94.1%, liquidity constraints have become more stringent.
Since EY claims that these factors are putting pressure on banks’ traditional revenue streams, banks are concentrating on increasing operational efficiency and diversifying their revenue sources. Although the banks’ steady asset quality and growing non-interest revenue support their continued profitability, rate cuts that were put in place towards the end of 2024 are straining net interest margins and resulting in lower yields on loans. With additional rate decreases scheduled for September 2025, this trend is anticipated to continue.
Last month, financial ratings index Fitch also released a report spotlighting that Saudi Arabia’s banks are spearheading a shift in the region’s financing, resulting in increased US-dollar-dominated subordinated debt, which is being used to rapidly fund credit expansion and major national projects.
The Fitch report also stated that this is not just limited to Saudi Arabia, but is an emerging regional trend, which is bound to continue in 2026 as capital needs rise and tighter regulatory requirements are in place.
US dollar markets are in higher demand from Riyadh-based banks as Saudi Vision 2030 is in full swing, and the government’s trillion-dollar initiatives need large volumes of capital and complex, high-yield subordinated bonds to be issued.
Over $55 billion has already been released by GCC banks in 2025, surpassing the $36 billion that was issued in 2024. More than half ($29.3 billion), which includes $11.7 billion in additional Tier 1 (AT1) and Tier 2 capital, comes from Saudi banks. Subordinated debt currently accounts for about 70% of Saudi banks’ dollar issuance, up from over 50% in 2024.
Banks are moving toward riskier products that strengthen their capital bases. The surge was caused by several factors, according to Fitch. Saudi banks are experiencing the strongest credit growth in the GCC, with a projected 12% increase in loans in 2025. This loan bubble, which outpaces deposit growth and rapidly declining capital buffers, finances Vision 2030 projects.
While there may be challenges in the near-term, the region has recorded robust banking activity, and these banks have also laid the foundations for strong long-term plans which are bound to bear fruit despite regional or global economic instability.
