The UAE banking sector is poised for robust lending growth in 2025, fueled by favorable monetary policy and a supportive economic environment, according to Puneet Tuli, an analyst at S&P Global Ratings.
Lending Growth Supported by Increased Deposits
Over the past three years, UAE banks have experienced a notable rise in deposits, which will underpin their growth momentum. However, Tuli cautioned that some external deposits could be vulnerable to economic fluctuations, presenting a potential challenge to stability.
While lending books are expected to expand, sector profitability may see a slight dip compared to the exceptional performance of recent years.
“We expect the cost of risk to remain low, and therefore, UAE banks’ profitability should remain high, albeit lower than the peak of 2023,” Tuli explained.
Resilience Backed by Low Non-Performing Loans
S&P Global Ratings forecasts that non-performing loans and credit losses will remain minimal, supported by the robust performance of the UAE’s non-oil sectors. Additionally, anticipated interest rate cuts are expected to enhance the underlying asset quality of banks.
Strengthened Capital Buffers
Strong capital buffers continue to be a cornerstone of the UAE banking sector’s resilience. Banks are expected to further bolster their capital reserves through high internal capital generation, driven by strong profitability and supportive shareholder practices. Dividend payouts are projected to remain below 50%, which will aid in capital preservation.
The sector’s capital quality also remains solid, with hybrid instruments making up a small portion of the total capital structure. By the end of 2023, additional Tier 1 (AT1) instruments accounted for 12.2% of total adjusted capital.
Opportunities from Declining Interest Rates
The forecasted decline in interest rates presents UAE banks with an opportunity to optimize costs by issuing new hybrid instruments at lower rates as existing ones mature.
“The decline in interest rates offers banks the chance to boost hybrid issuance and replace existing instruments at a lower cost when their call dates arise,” Tuli noted.
The UAE banking sector is well-positioned to maintain its resilience and capitalize on growth opportunities in 2025. While profitability may not match 2023’s highs, the sector’s solid fundamentals, coupled with strong deposit growth and low credit risks, ensure a positive trajectory.
