Gulf Lenders Adjust Funding Strategies Amid Ongoing Iran Conflict

Gulf banks are increasingly turning to private placements and syndicated loans as the ongoing conflict involving Iran continues to disrupt public debt markets and alter funding strategies throughout the region. According to Fitch Ratings, financial institutions within the Gulf Cooperation Council are likely to favor more discreet, negotiated funding avenues if market volatility persists, limiting opportunities in public bond markets. This strategic shift represents a notable change from the robust public issuance activity observed at the beginning of 2026, when banks capitalized on more stable market conditions before the escalation of geopolitical tensions led to increased risk premiums. In the first four months of this year, Gulf banks issued approximately $17.5 billion in dollar-denominated debt, marking a 20 percent increase compared to the same period last year. When including certificates of deposit, total issuance approached $27 billion. Senior notes constituted 41 percent of this issuance, predominantly from banks in the United Arab Emirates and Qatar. Certificates of deposit accounted for 35 percent, primarily from Saudi banks, while Additional Tier 1 and Tier 2 instruments made up 24 percent, with Saudi Arabia again playing a significant role in capital-raising efforts. This distribution indicates that while banks began the year with ongoing funding requirements, their preferred methods are evolving as investors become more cautious in pricing geopolitical risks. Following the onset of the conflict, credit spreads across most capital structures widened, although they have since partially tightened. From late February to the end of April, senior and Tier 2 spreads increased by an average of 6 basis points, while AT1 spreads narrowed by approximately 12 basis points. The relative stability of AT1 pricing can be attributed to the buy-and-hold strategies of Shariah-compliant investors, expectations of government support, and strong capital buffers, with nearly 65 percent of Gulf bank AT1 instruments being sukuk. Saudi banks are anticipated to reduce their dollar issuance more significantly than previously expected as loan growth begins to slow. This adjustment follows a period of substantial credit expansion that heightened funding needs and widened the disparity between loans and deposits. Fitch has cautioned that a prolonged conflict could exert pressure on the viability ratings of Saudi banks if liquidity challenges intensify, although robust capital positions and official support serve as critical safeguards. In contrast, lenders in the UAE may increase their issuance to refinance approximately $4.4 billion in maturing debt, which could keep them active in debt markets despite fluctuating issuance conditions. Similarly, banks in Qatar are expected to remain engaged in refinancing efforts where investor demand allows for negotiated transactions without the full exposure associated with public syndication. Syndicated financing is gaining traction due to its advantages, including privacy, execution certainty, and more flexible documentation compared to public bond offerings. Islamic syndicated financing has become particularly significant, reaching $23 billion in the first quarter of 2026, surpassing dollar sukuk issuance of $20 billion and reflecting a sharp increase from the previous year. Currently, Islamic syndications account for about half of Gulf syndication issuance, up from 35 percent in 2025. The broader debt capital market remains susceptible to repricing related to ongoing conflicts. Gulf debt capital market spreads reached a five-year high during the war, although they remained below levels seen during the pandemic. By late March, outstanding Gulf debt capital market instruments totaled approximately $1.2 trillion, a 14 percent increase year on year, with sukuk comprising 41 percent of this total. Private placements have also been utilized by regional sovereigns and state-linked borrowers as public markets have become more challenging. Gulf borrowers raised over $10 billion in private markets during a brief period of heightened stress, with global banks advising on several transactions. Standard Chartered noted that Gulf fundraising contributed to an increase in advisory income, despite recording a $190 million charge related to the potential credit impact of the conflict. Bank liquidity conditions may weaken if the conflict persists or escalates, but substantial holdings of investment-grade securities provide avenues for repo funding. Strong domestic deposit bases, connections to state ownership, and access to official liquidity channels continue to mitigate immediate pressures on credit profiles.

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