UAE Banks Set for Strong Lending Growth in 2025

S&P Global Ratings analyst Puneet Tuli expects the UAE banking industry to have strong lending growth in 2025 with monetary policy relaxation and a good economic environment. 

Deposit Increases and Growth Momentum:

He said that foreign deposits are also exposed to the risk of uncertainty but on the other hand banks have seen a substantial growth in their deposits over the last three years that will continue to help them maintain the growth pace. The profitability of the industry may decline slightly in 2025 after two consecutive years of solid performance despite loan books expected to rise.

Profitability Projections for 2025:

“We expect the cost of risk to remain low and therefore, UAE banks profitability should remain high, albeit lower than the peak of 2023,” Tuli said. Despite the anticipated growth in loan books, the industry’s profitability may marginally deteriorate in 2025 following two years of robust performance.

The non-oil sectors are likely to keep the level of non-performing loans and credit losses within low levels as estimated by the S&P and the anticipated reduction of the rates will positively impact the quality of underlying assets. Over the past years, the banking industry’s resiliency was supported by the strong capital buffers.

Improvement in Capital Buffers:

According to the analyst, the capital buffers of the banks are to be strengthened with high profitability as well as good quality of capital by the high level of internal capital production through strong benevolent shareholders and dividends below 50%. A little amount of the capital is of hybrid instruments. The quality of the capital however is very high. Additional Tier 1 instruments occupied 12.2% of total adjusted capital by the end of 2023.

Tuli said the interest rate drop gives banks an opportunity to enhance hybrid issuance and replace current instruments at a reduced cost when their call dates come around.