UAE banks are set to remain strong in 2025, supported by a robust domestic economy and favorable business conditions, according to a report by S&P Global Ratings. While lending growth is expected to pick up due to lower interest rates and an improving economic environment, bank profits may see a slight dip compared to previous years.

The report highlights that banks will benefit from lower credit losses and better asset quality. Nonperforming loans have dropped significantly, now standing at 4 percent of gross loans for the top 10 banks, compared to 6.1 percent in 2021. Over the last two years, banks have also used their profits to clear older bad loans, further strengthening their financial position.

Despite facing potential challenges like regional geopolitical tensions and oil price fluctuations, the report remains optimistic about the banking sector’s resilience. As Economy Middle East reports, “UAE banks are expected to maintain strong capital buffers, solid funding profiles, and benefit from continued government support.”

Strong GDP growth between 2025 and 2027, driven by increased hydrocarbon production and thriving non-oil sectors, is likely to further boost the economy. A business-friendly environment, simplified visa policies, and low corporate taxes are also expected to attract new businesses and residents, enhancing overall growth.

While profitability is likely to decline slightly as interest rates fall, the report emphasizes that UAE banks will still maintain strong efficiency. Factors such as digital transformation, optimized real estate use, and offshore staff relocations will help contain costs and support profits.

Capitalization levels are expected to remain robust, with banks continuing to generate internal capital through solid profits. Shareholders are likely to maintain payout ratios below 50 percent, ensuring strong capital reserves. Additionally, lower interest rates will give banks the opportunity to refinance hybrid instruments at reduced costs, further strengthening their financial health.

The report concludes that UAE banks are well-positioned to balance growth and risks, leveraging their strong foundations and the supportive economic environment.