According to a recent report by S&P Global Ratings, banks in the United Arab Emirates are reaping the benefits of a thriving domestic economy, which has led to enhanced asset quality and lower credit losses. The report anticipates that these positive trends will continue throughout 2025.
S&P Global expects sustained economic growth in the UAE, highlighting that increased hydrocarbon production will bolster real GDP growth over the next several years. This growth is further supported by a robust non-hydrocarbon sector. The report underscores the impact of business-friendly regulations, a competitive corporate tax environment, simplified visa processes, and the success of long-term residency visas in attracting new enterprises and increasing the population.
Although the country could face pressures from regional geopolitical tensions and fluctuations in oil prices, S&P believes that economic risks remain manageable, given the proven resilience demonstrated during previous downturns. The ratings agency projects a slight dip in the robust earnings of the banking sector in 2025 after a strong performance in prior years. It notes that the lending portfolio is expected to keep expanding as monetary policies ease.
Despite potential challenges from geopolitical concerns and oil price volatility, S&P believes that the risks can be kept under control. The agency foresees that UAE banks will maintain stable capital reserves, strong funding structures, and continued government backing, which will further bolster their resilience. The report also predicts sustained lending growth, bolstered by a favorable economic environment and decreasing interest rates. “We anticipate strong lending growth will continue into 2025, fueled by ongoing monetary policy easing,” the report states.
Over the last three years, banks have experienced a significant rise in deposits, which further supports their growth trajectory. Furthermore, S&P expects the quality of banking assets to improve consistently. The agency foresees low non-performing loans and credit losses, attributing this to the solid performance of non-oil sectors and anticipated interest rate cuts. In the past two years, banks have leveraged their strong profitability to make provisions for legacy loans and have successfully written them off.
As of September 30, 2024, the top ten banks, which comprise 85% of the banking system, reported that stage 3 loans dropped to just 4% of gross loans, a significant decrease from a peak of 6.1% in 2021. The enhanced economic landscape has also facilitated better recoveries on written-off loans, contributing to a reduction in net credit losses. Additionally, the agency noted that the profitability of UAE banks has improved due to previous monetary tightening, which enhanced interest margins. As interest rates decline, S&P predicts that profitability will also follow suit. The cost of risk is expected to remain low, ensuring that while profitability may be lower than the record levels seen in 2023, it will still be robust.
Overall, S&P Global Ratings identifies a favorable trend in the UAE’s economic risk profile, citing the stellar performance of the non-oil economy as a key factor in enhancing banking asset quality and reducing credit losses.
