The UAE banking sector demonstrated robust performance in 2024, characterized by a notable increase in lending and improved cost efficiency. According to a report by Alvarez & Marsal (A&M), the sector saw double-digit growth in lending, with a remarkable 12.6 percent year-on-year (YoY) increase across the top 10 banks. This growth was heavily influenced by a striking 19.9 percent surge in retail loans, fueled by consumer demand for mortgages, personal financing, and credit cards.

Despite facing pressure from elevated interest rates, banks effectively capitalized on strong retail demand and maintained disciplined cost management to sustain their profitability. This approach has set a positive trajectory for continued growth into 2025. Although corporate and wholesale lending still dominated the market with a 55.5 percent share of total loans, retail lending has emerged as a critical growth engine reflecting both consumer confidence and the banks’ strategic focus on high-yield segments.

Deposit mobilization in the banking sector grew at a slower pace of 10.7 percent YoY, with time deposits increasing by 11.1 percent, thanks to higher interest rates. Current and savings account (CASA) deposits, which are typically a low-cost funding source, rose moderately by 8.0 percent. This discrepancy between credit expansion and deposit growth raised the loan-to-deposit ratio (LDR) to 76.2 percent, which marked an increase of 130 basis points from 2023.

Asad Ahmed, the managing director for Financial Services at A&M, highlighted that retail lending has been a significant growth catalyst, showcasing strong consumer confidence and the banks’ strategic emphasis on profitable lending sectors. Analysts anticipate that as the Central Bank of the UAE (CBUAE) aligns its monetary policy with potential rate cuts from the US Federal Reserve, funding costs may ease, which could stimulate corporate borrowing.

The positive outlook for the banking sector is further supported by the UAE’s projected GDP growth of 4.5 percent for 2025, driven by growth in tourism, construction, and non-oil trade. In 2024, Dubai welcomed a record 20 million tourists, and Abu Dhabi’s initiatives in industrial diversification are expected to boost demand for both commercial credit and transaction banking services.

However, banks will face challenges in maintaining deposit growth amid potential rate cuts and optimizing their digital investments to protect profitability. The rise of fintech and open banking platforms is reshaping customer expectations, compelling traditional banks to innovate rapidly. Analysts noted that the UAE banking sector stands at a crucial juncture, emphasizing that those who invest in technology to improve customer experience and operational efficiency will lead future growth.

In 2024, while higher interest rates increased yields on credit by 70 basis points YoY, banks also dealt with rising funding costs, which climbed by 60 basis points. This situation pressured net interest margins (NIM), which contracted by 12 basis points to 2.7 percent. Nonetheless, non-interest income provided a cushion, with fee and commission revenue increasing by 22.0 percent YoY from wealth management, trade finance, and digital transaction services.

Operating income rose by 10.7 percent, outpacing an 11.7 percent increase in expenses. The sector’s cost-to-income (C/I) ratio remained efficient at 30 percent, with only a slight increase of 24 basis points. Enhanced risk management and economic resilience led to a 26.8 percent YoY decrease in impairment charges, bringing the cost of risk (CoR) down to a five-year low of 0.5 percent, a reduction of 25 basis points from 2023. The non-performing loan (NPL) coverage ratio dipped slightly to 104 percent, indicating confidence in asset quality.

Despite these advancements, net profitability faced some difficulties, with return on equity (RoE) declining by 87 basis points and return on assets (RoA) decreasing by 6 basis points, partly due to higher capital reserves and competitive pricing in retail segments.