Credit resilience becomes key priority for GCC financial sector, KPMG says

Credit resilience is emerging as a major priority for financial institutions across the GCC as geopolitical tensions and economic uncertainty create a more complex risk environment, according to KPMG Middle East.

In its latest analysis, “Credit Risk Considerations During Times of Geopolitical Upheaval”, KPMG outlines measures banks and financial institutions can take to strengthen credit risk management, including forward-looking scenario analysis, stronger governance and continuous portfolio monitoring.

The analysis comes as the GCC banking sector continues to maintain strong financial fundamentals. KPMG said the region's banks recorded a capital adequacy ratio of 19.3% earlier this year, highlighting the strength of capital buffers and risk management practices developed over recent years.

Geopolitical risks put credit portfolios under pressure

KPMG's analysis examines the potential impact of heightened geopolitical tensions and disruptions around the Strait of Hormuz on borrower performance, funding conditions and overall portfolio quality.

The report emphasises that financial institutions need to identify emerging risks before they translate into significant credit deterioration. Rather than relying solely on historical performance, banks are encouraged to regularly reassess assumptions and test their portfolios against a range of possible scenarios.

Craig Wright, Partner and Head of Enterprise Risk Services at KPMG Middle East, said the GCC financial sector's strong capital position provides a solid foundation, but institutions must continue adapting their risk management practices.

Four-scenario framework

KPMG's analysis introduces a four-scenario framework designed to help financial institutions assess how different geopolitical and economic conditions could affect liquidity, funding costs and asset quality.

The approach focuses on scenario analysis, stress testing and provisioning across potential outcomes ranging from short-term disruptions to prolonged structural changes. The analysis also highlights the potential role of central banks in supporting liquidity if market disruptions persist.

Three key areas of credit pressure

Across the scenarios examined, KPMG identifies three major areas of potential pressure:

• Retail portfolios: Households could face income erosion and higher repayment pressures as inflation affects disposable income.
• Corporate borrowers: Businesses may experience revenue disruptions, increased funding costs and greater reliance on existing credit facilities.
• Commercial real estate: Properties in markets with large expatriate populations could face collateral valuation risks if economic conditions deteriorate.

Strengthening credit risk management

KPMG recommends that financial institutions update credit loss assessments to reflect changing macroeconomic conditions and conduct regular portfolio stress tests.

Banks should also strengthen oversight of higher-risk sectors and reinforce governance frameworks around credit risk management. Integrating geopolitical and macroeconomic developments into existing risk frameworks can help institutions respond more effectively to emerging threats.

With GCC banks entering the current period of uncertainty from a position of strong capitalisation, KPMG said continued monitoring, scenario planning and disciplined risk management will be important to maintaining long-term credit resilience.