MAYS IBRAHIM (ABU DHABI)
UAE banks are expected to maintain relatively strong lending growth this year even as conflict-related disruption weighs on Gulf economies, according to a report by S&P Global.
While average credit growth across Gulf Cooperation Council banks is forecast to moderate to 5%-6% in 2026, lending in the UAE and Saudi Arabia is expected to remain in the high single digits.
Banks in the two countries had the highest net interest margins in the GCC, at about 2.7% to 2.8% at the end of March, helped by lower funding costs, stronger operating efficiency and larger domestic economies.
The ratings agency expects the GCC economy to contract by an average of 2% this year amidst regional tensions. Even so, it forecast the UAE, Saudi Arabia and Oman to continue recording positive growth.
In the UAE, several government projects remain on track despite the challenging regional backdrop, while higher oil production is expected to provide an additional boost to the economy, helping sustain lending expansion.
Asset quality across GCC banks has so far held steady, according to S&P. The average ratio of non-performing loans stood at 2.6% at the end of March 2026.
However, more than half of the region's 50 largest banks reported a rise in the cost of risk – the amount set aside for potential loan losses – with UAE banks among those increasing provisions to reinforce their financial buffers.
S&P expects the average cost of risk across GCC banks to rise by about 20 basis points this year.
The report also pointed out that UAE banks have reduced one of their key vulnerabilities by cutting exposure to real estate and construction. Such lending accounted for 13% of total loans as of March 31, down from 21% at the end of 2020. That compares with 31% in Qatar, 25% in Kuwait, 16% in Saudi Arabia and 12% in Bahrain, according to the report.
Beyond asset quality, S&P said Gulf banks entered the year with strong funding positions. Deposit growth outpaced loan growth, while public sector deposits accelerated across the region, led by the UAE, Kuwait and Saudi Arabia. Most large banks also reduced their reliance on interbank borrowing to lower funding costs.
Deposits from governments and public entities in GCC countries increased by about $53 billion in the first three months of 2026, followed by a further $21 billion in April.
The ratings agency said UAE banks, along with Kuwaiti lenders, appear well placed to absorb an external funding shock in a downside scenario because of ample foreign liquidity.
Omani banks also remain in a moderate net-external-asset position, while Saudi lenders retained resilience through external liquid assets despite a continued build-up of external debt.
Across the GCC, liquid assets accounted for about 20% of bank balance sheets on average, while the region’s top 50 banks maintained an average Tier 1 capital ratio of about 17%, a key measure of core loss-absorbing capital.