The major banks in the UAE are expected to achieve high single-digit loan growth in the second quarter, as analysts suggest that the ongoing Iran-Israel conflict is unlikely to dampen borrowing demand. This optimistic outlook comes as increased lending is anticipated to offset slightly lower net interest margins, which, in turn, should satisfy equity investors who view banking stocks as a reflection of the UAE’s robust economy. The International Monetary Fund forecasts a 4 percent growth for the UAE economy this year.

Chiro Ghosh, vice president for financial institutions at Bahrain’s Sico Bank, expressed confidence in the lending environment, stating, “I do not foresee any drop in borrowing demand, which has remained fairly strong.” He added that he does not expect the conflict to result in any significant strategic changes for the banks unless there is further escalation. Echoing this sentiment, Sherif El Etr, a banking analyst at CI Capital in Cairo, noted that the war was too brief to have a lasting impact on banks’ lending practices or on consumer and corporate borrowing.

El Etr predicts that UAE banks’ loan books will expand by 8-9 percent in comparison to the same period in 2024 and by 2 percent compared to the previous quarter. He is responsible for analyzing major banks such as First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, and Dubai Islamic Bank. He highlighted that Dubai’s real estate sector will be a key driver of this quarterly loan growth, attributing it to lower interest rates and the expectation of further rate cuts, which should stimulate borrowing from real estate developers and long-term investors.

According to a central bank report, the total credit extended by UAE domestic banks reached AED1.73 trillion ($471 billion) as of March 31, marking a 5.9 percent increase year on year and a 1.7 percent rise since the end of 2024. While lending increases are often accompanied by higher non-performing loans (NPLs), the latest data from S&P Global indicates that problem loans have actually decreased, both in absolute numbers and as a percentage of total lending. El Etr remarked, “The outlook for NPLs is benign.”

Despite the anticipated growth in lending, banks’ net interest margins are expected to shrink compared to the same period last year. This is attributed to a decline in U.S. interest rates, which have dropped by 1 percentage point to 4.5 percent following several reductions from August to December last year. The UAE central bank typically aligns its rate changes with those of the U.S. due to the dirham’s peg to the dollar.

The recent Iran-Israel conflict, which has concluded with a tentative ceasefire, may affect the perception of UAE banks as safe havens for deposits. Over the past decade, these banks have seen an influx of deposits from non-resident foreigners, a trend that began during the Covid-19 pandemic. Other crises, such as the collapse of Silicon Valley Bank in March 2023, have further increased the appeal of UAE government-backed lenders. El Etr noted that First Abu Dhabi Bank was the largest beneficiary of these deposit inflows.

Data from the central bank, which is reported with a three-month delay, along with banks’ second-quarter earnings, will clarify whether the proximity to Iran and ongoing geopolitical tensions have led to depositors withdrawing funds. Significant withdrawals could increase banks’ funding costs, as deposits are typically the most economical source of funding.

As of March 31, UAE bank deposits reached a record AED2.48 trillion, an increase of 64 percent since January 2020, according to calculations from AGBI. In contrast, sector deposits grew only 18 percent from December 2015 to January 2020.

From a valuation standpoint, Abu Dhabi banks appear to be more expensive than their Dubai counterparts. The trailing price-to-earnings ratio for both First Abu Dhabi Bank and Abu Dhabi Commercial Bank stands at 10.5, while Abu Dhabi Islamic Bank’s is at 13.5. This is in contrast to Emirates NBD’s ratio of 6.6 and Dubai Islamic Bank’s 8.7, according to Simply Wall St. This price increase follows a rally in Abu Dhabi banking shares, with ADIB rising 51 percent this year and FAB and ADCB gaining 22 and 28 percent, respectively.