The UAE banking sector is set to experience significant lending growth in 2025, driven by an easing of monetary policy and a favourable economic environment, according to S&P Global Ratings analyst Puneet Tuli.
Over the past three years, banks have witnessed a substantial rise in deposits, which will continue to support their strong growth momentum. However, he noted that some external deposits could be vulnerable to fluctuations due to economic uncertainties.
While lending is expected to increase, the sector’s profitability might experience a slight dip in 2025 following two years of strong performance.
“We anticipate the cost of risk to stay low, meaning UAE banks’ profitability should remain strong, though somewhat reduced from the peak seen in 2023,” Tuli stated.
S&P predicts that non-performing loans and credit losses will remain low, supported by the solid performance of the non-oil sectors, and that anticipated interest rate cuts will improve the overall quality of assets.
The banking sector’s resilience over recent years has been underpinned by strong capital buffers. Banks are expected to further strengthen their capital reserves through robust internal capital generation, driven by high profitability, supportive shareholders, and dividend payouts generally below 50%, according to the analyst.
The quality of capital remains strong, with hybrid instruments making up a modest portion. At the end of 2023, additional Tier 1 instruments accounted for 12.2% of total adjusted capital.
Tuli mentioned that the reduction in interest rates presents an opportunity for banks to increase hybrid issuance and replace existing instruments at a lower cost when their call dates arrive.
