UAE Banks to Witness Strong Lending Growth in 2025 Amid Favorable Policies
The UAE banking sector is poised for substantial lending growth in 2025, bolstered by favorable monetary policies and a thriving economic environment. According to S&P Global Ratings analyst Puneet Tuli, non-performing loans (NPLs) and credit losses are expected to remain minimal, reinforcing the sector's stability and growth potential.
Key Drivers of Growth in UAE Banks
Monetary Policy Relaxation
The anticipated relaxation of monetary policies will be a key enabler of lending growth in 2025. As interest rates trend downward, banks are expected to see an improvement in asset quality and an increase in loan disbursement across various sectors.
Economic Resilience
The UAE's robust non-oil sectors have consistently supported the banking industry's stability. With strong capital buffers and sustained growth in deposits, the banking sector is well-equipped to capitalize on economic opportunities. Over the past three years, banks have reported significant deposit growth, which continues to drive liquidity and lending capacity.
Low Credit Losses and Cost of Risk
Tuli predicts that the cost of risk will remain low, allowing banks to sustain high levels of profitability. However, profitability in 2025 may slightly decline compared to the record-breaking years of 2023 and 2024.
Non-Performing Loans and Credit Losses
S&P Global Ratings forecasts that NPLs and credit losses will stay at historically low levels, thanks to the UAE’s strong economic policies and diversification efforts. This stability provides a secure foundation for banks to expand their lending portfolios while maintaining healthy balance sheets.
Profitability and Capital Reserves
Although profitability is expected to decrease marginally in 2025, UAE banks will continue to benefit from solid internal capital generation and high shareholder support. Dividend payouts are anticipated to remain below 50%, enabling banks to bolster their capital reserves. As of the end of 2023, hybrid instruments, such as additional Tier 1 instruments, constituted only 12.2% of total adjusted capital, showcasing the sector’s robust capital quality.
Related: The UAE’s Cepa Initiative: Redefining Global Trade and Economic Growth
Related: UAE Becomes Africa's Top Investor Amid Concerns Over Labor and Environmental Standards
Opportunities from Declining Interest Rates
The decline in interest rates presents an opportunity for UAE banks to optimize their funding costs. Tuli highlights that banks could increase hybrid issuances and replace existing instruments at lower costs as call dates approach, further enhancing financial efficiency.
Challenges and External Deposit Volatility
While external deposits have contributed significantly to the sector's growth, they remain susceptible to economic uncertainties. Banks must carefully manage these fluctuations to maintain a stable growth trajectory.
Outlook for 2025
The UAE banking sector is on track for sustained growth, driven by favorable policies, economic diversification, and resilient capital structures. Despite a modest dip in profitability, the industry is well-positioned to navigate challenges and capitalize on emerging opportunities in a dynamic economic landscape
