Banks in the UAE are likely to continue benefiting from a strong domestic economy in 2025, a new report said.
They will also see improved asset quality metrics and lower credit losses, even though their earnings are likely to dip slightly in 2025 while their lending book continues to expand, S&P Global Ratings said in its report ‘United Arab Emirates Banking Sector 2025 Outlook: Balancing Growth And Risks Amid Economic Expansion’.
The report is optimistic that although the UAE could be affected by regional geopolitical tensions and oil price volatility, risks are likely to remain in check.
“We expect UAE banks to maintain stable and strong capital buffers, robust funding profiles, and continued government support, which will underpin their resilience,” it said.
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Strong GDP growth
As hydrocarbon production picks up, real GDP growth will remain strong in 2025-2027, further supported by buoyant non-hydrocarbon activity, the report said.
Moreover, business-friendly regulations and a low corporate tax regime, along with a simplified visa regime, and the success of long-term residency visas are likely to continue to fuel new businesses and increase the population in the country.
Managing risks
The report adds that even though the UAE is potentially vulnerable to sudden increases in regional geopolitical tensions and significant drops in oil prices, economic risks will remain manageable, supported by demonstrated resiliency during past periods of lower oil prices and heightened geopolitical instability.
Lending growth
Lower interest rates and supportive economic environment are likely to boost lending growth in 2025.
“Banks have seen a notable increase in deposits over the past three years, which will support their strong growth momentum. However, some deposits are external and may be susceptible to volatility due to economic vulnerabilities,” the report said.
At the same time, asset quality will also show improvement, with UAE banks’ nonperforming loans and credit losses likely to remain low as solid performance of the non-oil sectors and expected rate cuts help improve underlying asset quality.
“Over the past two years, banks used their high profitability to set aside provisions for legacy loans and have written them off, resulting in stage 3 loans for the 10 top banks (accounting for 85 percent of banking system) dropping to 4 percent of gross loans as of September 30, 2024, down from the peak of 6.1 percent in 2021,” the report said.
“In addition, the improved economic environment has meant higher recoveries of written-off loans, contributing to lower net credit losses,” it added.
Lower profitability
Lenders are likely to see a slight reduction in profitability as interest rates decline.
The banks’ profitability had improved with monetary tightening, as higher interest rates helped expand margins.
“We now expect profitability to follow amid declining interest rates. We expect the cost of risk to remain low, and therefore UAE banks’ profitability should remain high, albeit lower than the peak of 2023,” the report said.
Banks are also likely to maintain strong efficiency due to optimized real estate, staff relocation to cost-effective offshore locations, and increased digitalization, all of which will enhance profitability.
Capitalization support
Banks have had strong capital buffers over the past several years, and the trend is likely to continue in 2025 as well.
“We anticipate that banks will bolster their capital buffers with robust internal capital generation, driven by high profitability and supportive shareholders and dividend payouts that are generally below 50 percent,” the report said.
“The quality of capital remains strong, with a modest share of hybrid instruments. As of year-end 2023, additional Tier 1 instruments accounted for 12.2 percent of total adjusted capital. The decline in interest rates offers banks the chance to boost hybrid issuance and replace existing instruments at a lower cost when they reach their call dates,” it added.
