UAE Banks Poised for Stable Growth in 2025: Strong Lending and Asset Quality Boost Profitability
UAE banks are on a solid path heading into 2025, thanks to improved asset quality, robust lending growth, and strong profitability. According to S&P Global Ratings’ latest report, “UAE Banking Sector 2025 Outlook”, the country’s banks have benefited from a thriving domestic economy, resulting in better asset quality and reduced credit losses.
Strong Economic Foundations Support Banking Growth
The UAE’s strong economic performance has significantly contributed to the banking sector’s resilience. With hydrocarbon production on the rise and buoyant non-hydrocarbon activity, the country is set for steady GDP growth between 2025 and 2027. Business-friendly regulations, low corporate taxes, and simplified visa processes attract new businesses and boost population growth. These factors collectively fuel demand for banking services, helping UAE banks expand their lending portfolios.
Despite potential risks like regional geopolitical tensions and fluctuating oil prices, UAE banks are expected to manage these challenges effectively. The sector’s demonstrated resilience during past periods of instability, combined with strong government support, ensures stability.
Robust Lending and Deposit Growth Drive Momentum
Over the past three years, UAE banks have seen a notable increase in deposits, which supports their growth momentum. Lending growth is expected to remain strong in 2025, aided by easing monetary policy and a supportive economic environment. However, some external deposits may face volatility due to economic vulnerabilities.
UAE banks have also reduced nonperforming loans significantly. By setting aside provisions and writing off legacy loans, the top 10 banks, which account for 85% of the system, brought stage 3 loans down to 4% of gross loans by September 2024, compared to 6.1% in 2021. With solid non-oil sector performance and upcoming interest rate cuts, nonperforming loans and credit losses are projected to remain low.
High Profitability to Continue Despite Slight Dip
UAE banks have benefitted from monetary tightening, with higher interest rates expanding profit margins in recent years. However, as interest rates decline, profitability is expected to dip slightly in 2025. Despite this, the cost of risk will likely stay low, ensuring high profitability levels overall, albeit lower than the peak seen in 2023.
Optimized real estate usage, cost-effective offshore staff relocation, and increased digitalization have enhanced operational efficiency for UAE bank. These measures are expected to further improve profitability while keeping costs under control.
Resilience Amid Risks
Although regional geopolitical tensions and oil price volatility pose potential challenges, these risks are considered manageable. UAE bank have proven their resilience during past periods of economic instability, supported by strong capital buffers, robust funding profiles, and ongoing government support. These factors underpin the sector’s ability to navigate potential headwinds.
UAE banks are set to maintain stable growth in 2025, driven by improved asset quality, strong lending, and high profitability. With a supportive economic environment, continued innovation, and efficient operations, the sector is well-positioned to overcome challenges and deliver solid results. This stability reinforces UAE banks’ crucial role in the country’s economic success.