Gulf Banks Post Strong Profits Despite Margin Pressure

Gulf banks delivered a robust performance in the first half of 2025, posting stronger profits and healthier balance sheets even as lower interest rates began to narrow lending margins, according to a new industry report.

The EY GCC Banking Sector Outlook showed that average return on equity across regional banks climbed to 13.2 percent, supported by higher non-interest income and disciplined cost management. Operating efficiency also improved, with the sector’s cost-to-income ratio falling to 32 percent. At the same time, asset quality strengthened, as non-performing loans declined to 2.4 percent from 2.8 percent a year earlier.

The sector’s resilience is underpinned by a broadly positive macroeconomic outlook. Economic growth in the Gulf is forecast at 3 percent in 2025, accelerating to 4.1 percent in 2026 on the back of infrastructure spending, economic diversification programmes, and growing private sector activity.

Separately, Kamco Invest reported that GCC-listed banks posted a record $16.2 billion in net profit during the second quarter. This was driven by revenue growth and efficiency gains, which helped offset rising impairment charges.

“With solid capital buffers, healthier balance sheets and improved efficiency, banks are well-positioned to navigate near-term pressures and pursue long-term opportunities,” said Mayur Pau, EY MENA financial services leader.

Capital strength remains a key feature of the sector. Gulf banks reported an average Tier 1 capital ratio of 17.5 percent and a capital adequacy ratio of 18.9 percent, providing significant resilience against potential economic shocks.

However, the report noted that challenges are emerging. Net interest margins contracted to 2.6 percent in the first half of 2025, down from 2.8 percent a year earlier, reflecting the impact of rate cuts that began in late 2024. Liquidity conditions have also tightened, with the loan-to-deposit ratio rising to 94.1 percent.

These shifts are squeezing traditional revenue streams, prompting banks to place greater emphasis on diversifying income and improving operational efficiency.

“Bank profitability remains intact, underpinned by rising non-interest income and stable asset quality,” Pau said. “But net interest margins are under pressure following the repricing of loans at lower yields after recent rate cuts.”

He added that this trend is expected to persist, with further interest rate reductions announced in September 2025 likely to put additional strain on lending margins in the months ahead.

Despite these headwinds, analysts remain confident that Gulf banks are well-equipped to sustain growth. The combination of solid capital buffers, improved efficiency, and an expanding role for non-interest income is expected to help the sector weather short-term challenges while capitalising on opportunities tied to the region’s economic transformation.