The UAE banking sector is poised for continued growth in 2025, driven by a strong domestic economy, robust capital buffers, and easing monetary policy, according to the latest report from S&P Global Ratings. The sector is set to benefit from non-oil economic expansion and favourable regulatory frameworks, though potential headwinds such as geopolitical tensions and oil price volatility remain key risks.
Real GDP growth in the UAE is projected to remain strong through 2025-2027, supported by increased hydrocarbon production and a buoyant non-hydrocarbon sector. The report highlights that business-friendly regulations, simplified visa processes and long-term residency options are expected to further boost business activity and population growth.
Monetary easing is anticipated to foster lending growth in 2025. Despite previous tightening cycles, lower interest rates are expected to drive higher credit demand, with banks capitalising on improved liquidity. Deposit inflows, which have surged over the past three years, will continue to support this trend, though the report warns that external deposits remain susceptible to volatility.
Asset quality and nonperforming loans
Asset quality in the UAE’s banking sector has strengthened, with nonperforming loans (NPLs) decreasing significantly. As of September 2024, NPLs for the 10 largest banks accounted for 4% of gross loans, down from 6.1% in 2021. The improved credit environment has also led to higher recoveries of written-off loans. Banks have utilised strong profitability in recent years to provision against legacy loans, further enhancing their balance sheets.
Profitability and cost optimisation
While the sector experienced margin expansion during the monetary tightening phase, profitability is expected to decline slightly as interest rates fall. However, cost efficiencies—such as real estate optimisation, staff relocations to offshore locations, and increased digitalisation—will likely mitigate the impact. Despite the projected dip, return on assets and net interest margins are expected to remain robust.
Capitalisation
According to the report, UAE banks continue to maintain strong capital adequacy ratios, supported by internal capital generation and conservative dividend policies. By the end of 2023, Tier 1 instruments accounted for 12.2% of the sector’s total adjusted capital. The report notes that falling interest rates allow banks to refinance hybrid instruments at lower costs.
The funding structure remains stable, underpinned by a solid base of core customer deposits and limited reliance on external funding. The sector’s net external assets improved to 27.2% of systemwide domestic loans as of September 2024, reflecting resilience to potential disruptions in international capital markets.
Digitalisation and sectoral exposure
The UAE banking landscape has seen significant growth in digital offerings, driven by the rise of neobanks and fintechs. However, the report emphasises that these entities are expected to complement, rather than disrupt, traditional banking. Regulatory measures, such as the recent approval of a stablecoin registration framework, pave the way for digital asset innovation while maintaining financial stability.
The report also highlights the limited impact of energy transition risks on bank creditworthiness, with direct lending to high-exposure sectors accounting for 11% of total lending as of 2023. Diversification efforts and investments in renewable energy capacity are expected to mitigate long-term carbon transition risks.
Concentration risks
The real estate market, a key driver of the UAE economy, has experienced price surges over the past four years. While the delivery of presold properties in the next 12-24 months raises concerns of potential oversupply, the report notes that most off-plan sales are conducted in cash, limiting banks’ exposure. The sector’s share of total bank lending has decreased from 20% in 2021 to 15% as of mid-2024.
The report maintains a stable outlook for the UAE banking sector in 2025, citing strong asset quality, lending growth, and sustained profitability. However, it also highlights potential downside risks from regional geopolitical tensions and oil market fluctuations. Abu Dhabi Commercial Bank’s positive outlook reflects its strategy to reduce high-risk exposures and the expectation of continued government support if needed.
