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UAE banks to remain on stable path this year

Improved asset and strong lending growth to drive profitability, S&P Global says

Published: Thu 9 Jan 2025, 8:30 PM

Updated: Thu 9 Jan 2025, 8:31 PM

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UAE banks are on a stable path heading into 2025, reflecting banks’ strong performance deriving from improved asset quality, strong lending growth, and still high profitability, a report said on Thursday.

According to S&P Global Ratings’ ‘UAE Banking Sector 2025 Outlook’, banks in the UAE have benefitted from a strong domestic economy, leading to improved asset quality metrics and lower credit losses, is expected to persist in 2025.

After a strong performance in the past two years, S&P expects the sector’s robust earnings to dip slightly in 2025 and the lending book to continue expanding as monetary policy eases.

“Although the UAE could be affected by regional geopolitical tensions and oil price volatility, we believe risks will 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,” the report, written by Puneet Tuli, Mohamed Damak and Tatjana Lescova, said.

As hydrocarbon production picks up, S&P expects anticipate that real GDP growth will remain strong in 2025-2027, further supported by buoyant non-hydrocarbon activity. “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 said.

Despite potential vulnerability to sudden increases in regional geopolitical tensions and significant drops in oil prices, S&P believes that economic risks will remain manageable, supported by demonstrated resiliency during past periods of lower oil prices and heightened geopolitical instability.

Banks have seen a notable increase in deposits over the past three years, which will support their strong growth momentum. “We expect strong lending growth to persist in 2025, driven by the ongoing monetary policy easing and supportive economic environment,” the S&P analysts wrote. However, some deposits are external and may be susceptible to volatility due to economic vulnerabilities, they added.

Over the past two years, UAE banks have 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% of banking system) dropping to 4% of gross loans as of Sept. 30, 2024, down from the peak of 6.1% in 2021. “We anticipate UAE banks’ nonperforming loans and credit losses will remain low because the solid performance of the non-oil sectors and expected rate cuts will help improve underlying asset quality,” the report said. In addition, the improved economic environment has meant higher recoveries of written-off loans, contributing to lower net credit losses.

UAE banks’ profitability 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.

UAE banks should maintain strong efficiency due to optimised real estate, staff relocation to cost-effective offshore locations, and increased digitalization, all of which will enhance profitability, S&P said.



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