Today's Edition
A.SREENIVASA REDDY (ABU DHABI)
The UAE banking sector is set for another year of steady growth and resilience in 2025, buoyed by strong economic fundamentals, improving asset quality, and robust capital buffers, according to the UAE Banking Sector 2025 Outlook by S&P Global Ratings.
The report highlights the UAE’s dynamic economic environment, supported by both hydrocarbon and non-hydrocarbon sectors, which continue to enhance the banking system's performance and stability.
Banks in the UAE are expected to sustain strong lending growth, underpinned by monetary policy easing and a supportive economic climate. The ongoing expansion of deposits over the past three years has further strengthened growth momentum.
“Deposit growth has consistently outpaced lending, supported by corporate and retail savers prioritising savings and benefiting from higher interest rates,” the report stated. This trend is expected to continue in 2025, providing a solid base for UAE banks.
The asset quality of the UAE banks has markedly improved, with nonperforming loans (NPLs) dropping to 4% of gross loans by September 2024, compared to a peak of 6.1% in 2021. Banks have leveraged their high profitability to provision for legacy loans, resulting in reduced credit losses.
“This positive trajectory reflects the resilience of the UAE’s non-oil economy and enhanced recovery rates for written-off loans,” the report noted.
While profitability is expected to ease slightly due to declining interest rates, UAE banks are projected to maintain high returns due to operational efficiency. Optimised real estate use, cost-effective offshore staff relocation, and increased digitalisation are expected to further enhance profitability.
UAE banks continue to exhibit strong capital buffers, with Tier 1 capital ratios well above regulatory requirements. These buffers are bolstered by robust internal capital generation and shareholder support.
Net external assets have also strengthened, reaching 27.2% of system-wide domestic loans by September 2024. This positions UAE banks to withstand potential external funding volatility caused by geopolitical tensions or global economic uncertainties.
The UAE banking sector has embraced digitalisation and financial innovation, with traditional banks enhancing their digital offerings and neobanks gaining traction.
“We expect neobanks and fintechs to complement, not replace, traditional banks as the UAE's central bank continues to maintain the stability of the traditional banking system and encourage banks to strengthen their digitalisation efforts,” the report said.
Recent regulatory support for stablecoin frameworks further underscores the UAE’s forward-looking approach.
Moreover, economic diversification and increasing investment in renewable energy are helping mitigate risks associated with energy transition, ensuring long-term sustainability for the banking system.
“Local banks' direct lending to sectors exposed to energy transition is manageable — about 11% of total lending on average at year-end 2023,” the report said.
Overall, the UAE banks are entering 2025 with a strong foundation. The report emphasises their ability to navigate challenges while continuing to deliver value to stakeholders.
“With stable asset quality, robust funding profiles, and ongoing government support, the UAE banking sector is well-positioned to capitalise on growth opportunities,” the report said.
“Business-friendly regulations and a low corporate tax regime, a simplified visa regime, and the success of long-term residency visas will continue to fuel new businesses and increase the population in the country,” the report concluded.
