UAE banks thrive as non-oil growth and rate cuts boost sector outlook
The UAE's banking sector is set for continued growth, backed by a strong non-oil economy and expected interest rate cuts. A new report highlights improvements in asset quality, with non-performing loans falling to 4% of gross loans by September 2024.
Analysts predict steady economic expansion, driven by rising hydrocarbon output and thriving non-hydrocarbon industries. Banks are also benefiting from supportive regulations and a growing population, fuelling optimism for the sector's future.
The UAE's banking industry has seen a steady rise in deposits over the past three years. This increase has provided a solid foundation for lending growth, while non-performing loans (NPLs) and credit losses remain low. By September 2024, stage 3 loansāthose at the highest risk of defaultāhad dropped to just 4% of total gross loans.
High profitability has allowed banks to strengthen their financial positions. Many have used strong earnings to cover legacy loans and write-offs, reducing net credit losses. S&P expects this trend to continue, with banks maintaining strong capital buffers and resilient funding profiles, supported by government backing. Economic growth in the UAE is projected to stay on track, thanks to higher hydrocarbon production and a booming non-oil sector. Business-friendly policies, such as simplified visa processes and long-term residency options, are attracting more residents and fostering new enterprises. Lower interest rates and a stable economic environment are also expected to sustain momentum in the banking sector. While geopolitical tensions and oil price fluctuations pose potential risks, the UAE's past resilience suggests these challenges are manageable. The report notes that after two years of robust earnings, banking profits may ease slightly in 2025. However, lending growth is forecast to remain strong, underpinned by ongoing economic support and favourable conditions.
The UAE's banking sector is positioned for further improvement, with asset quality indicators strengthening and lending activity set to grow. Lower interest rates and a diversified economy will help maintain stability, even as global risks persist. Banks are expected to keep their financial footing strong, supported by high profitability and government measures.
