The banking sector in the UAE is expected to experience strong lending growth in 2025, supported by a more relaxed monetary policy and a favourable economic environment.

This is according to S&P Global Ratings analyst, Puneet Tuli.

Tuli noted that banks have seen a significant rise in deposits over the past three years, which will help sustain their growth momentum. However, he also cautioned that some external deposits might be vulnerable to fluctuations due to economic uncertainties.

While lending is projected to increase, the sector’s profitability may see a slight dip in 2025 after a strong performance in the previous two years, according to a Zawya report.

“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 commented.

In addition, S&P forecasts that non-performing loans and credit losses will stay low, supported by the strong performance of the non-oil sectors, while anticipated rate cuts are expected to improve asset quality.

The banking sector’s resilience over the past few years has been underpinned by strong capital buffers. Banks are expected to further strengthen these buffers through solid internal capital generation, driven by high profitability, supportive shareholders, and dividend payouts generally below 50%, according to the analyst.

Furthermore, the quality of capital remains robust, with hybrid instruments representing a small portion of the total. Indeed, as of the end of 2023, additional Tier 1 instruments made up 12.2% of total adjusted capital.

Tuli noted that the drop in interest rates presents banks with an opportunity to increase hybrid issuance and replace existing instruments at a lower cost when their call dates approach.