Lending Growth Driven by Easing Monetary Policy
The UAE banking sector is expected to experience significant growth in lending by 2025 on the back of easing monetary policies and supportive economic conditions, according to an analyst at S&P Global Ratings. This anticipated growth comes while banks in the region continue enjoying favorable conditions that are particularly conducive to non-oil sectors.
PC: Gulf Business
The lending books of the banking sector are expected to grow steadily with a significant increase in deposits over the last three years. According to Tuli, however, external deposits could face some volatility due to global economic vulnerabilities.
Profitability May Dip After Strong 2023
The sector is expected to improve its lending momentum, but profitability might decline a bit in 2025 compared to recent years that have seen the sector deliver such robust performance. There is still going to be low cost of risk, which will help maintain the higher profitability levels, though not as elevated as 2023.
Furthermore, S&P Global Ratings expects nonperforming loans and credit losses to remain low. This is as a result of the solid performance of the nonoil sectors in the UAE. Besides, expected cuts in rates for 2025 are likely to boost the quality of underlying assets that will further help in the sustainability of the banking sector.
Capital Buffers Resilient and Strong Asset Quality
The UAE banking sector has always remained resilient, well-supported by buffers of capital, which have accumulated over the years. Tuli said that in all likelihood, banks will continue to strengthen capital buffers through internally generated capital. High profitability and supportive shareholders combined with conservative payout of dividends of less than 50% should support this expansion.
The quality of the sector’s capital remains sound, with hybrid instruments at a relatively low proportion. Additional Tier 1 instruments will have reached 12.2% of total adjusted capital by the end of 2023, demonstrating good capital adequacy.
Declining Interest Rates Opportunities
The expected interest rate cut in 2025 provides good prospects for the UAE banks to fine-tune their financial structures. According to Tuli, with lower rates, the banks can issue hybrid instruments and replace existing ones at lower cost at times when their call dates are nearing. The action will further improve the cost efficiency of the sector while keeping its strong capital base intact.
In summary, the UAE banking sector is expected to grow robustly in lending activity in 2025, driven by supportive economic conditions and a resilient financial foundation. Profitability may decline slightly, but the overall performance of the sector is expected to remain strong, supported by low credit risks, solid capital buffers, and opportunities to optimize funding strategies.
