The UAE banking sector will register robust lending growth in 2025, driven by the easing of the monetary policy and a supportive economic environment, according to S&P Global Ratings analyst Puneet Tuli.

Banks have seen a notable increase in deposits over the past three years, which will support their strong growth momentum, he said, adding that some external deposits could be susceptible to volatility amid economic vulnerabilities.

While lending books are expected to expand, the sector’s profitability may slightly decline in 2025 after a strong performance in the past two years.

“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.

S&P projects that non-performing loans and credit losses will remain low due to the solid performance of the non-oil sectors, while expected rate cuts will enhance underlying asset quality.

Strong capital buffers have underpinned the banking sector’s resilience over the past several years. Banks are anticipated to bolster their capital buffers with robust internal capital generation, thanks to high profitability, supportive shareholders and dividend payouts generally below 50%, the analyst said.

The quality of capital remains strong, with hybrid instruments accounting for a modest share.  As of 2023-end, additional Tier 1 instruments comprised 12.2% of total adjusted capital.

Tuli said that the decline in interest rates offers banks the chance to boost hybrid issuance and replace existing instruments at a lower cost when their call dates arise.

(Editing by Brinda Darasha; brinda.darasha@lseg.com)