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UAE banks dig in for new era

11 April 2025

 

Gulf decision makers, like their counterparts elsewhere in the world, are gauging the potential impact of the world’s new tariff regime.

Amid the global economic turmoil emanating from Washington DC, UAE banks have reason to be confident about their prospects of withstanding the negative effects, after a strong 2024 that saw double-digit credit growth and solid profits across the board.

Full-year loan growth stood at 11% in 2024, notes ratings agency Fitch Ratings, while UAE banks’ profits reached a record-high level, with a 19.1% return on average equity.

Surprising success

Loan growth surprised on the upside, reflecting stronger activity from government-related entities (GREs), which has provided good business for Emirati banks. For example, majority government-owned Emirates NBD had almost one-quarter of its loan book exposed to the Dubai government and its GREs. 

The broader outlook is positive for UAE banks in 2025. Amid healthy operating conditions and robust liquidity, lending growth should remain close to double figures this year.

The combined net income of Fitch-rated banks was AED80bn ($19.8bn) in 2024, up from AED76bn ($18.8bn) in 2023. This rise was driven by a 10% expansion of the banks’ pre-impairment operating profit, contained loan impairment charges – due to the favourable operating environment – and strong coverage of already crystallised problem loans at most banks, said Fitch Ratings.

The UAE’s largest bank, First Abu Dhabi Bank (FAB), reported a 13% year-on-year increase in pre-tax profits to AED19bn ($4.7bn), supported by revenue growth of 15%. 

“UAE banks are at the top of the cycle,” says Anton Lopatin, UAE bank analyst at Fitch Ratings. “At Fitch, we’ve upgraded a lot of standalone ratings for banks in the last 24 months. Together with other factors that reflected that in the last two years we have seen some the highest profits ever in the UAE, because of the strong liquidity and the healthy economic environment.”

Although profitability is expected to decrease marginally in 2025, UAE banks will continue to benefit from solid internal capital generation and high shareholder support, according to S&P Global, another ratings agency.

Taxes, rates and regulations

UAE banks, like other companies active in the country, have also had to cope with the introduction of corporate tax, imposed in mid-2003 at an average 9% rate. Even so, UAE banks realised a high return on equity in 2024, despite it being the first full year in which banks paid corporate tax. 

UAE banks have benefited from the higher-for-longer interest rates, an avenue of earnings that is gradually closing off in light of the US Federal Reserve’s protracted series of rate cuts. Nonetheless, analysts see the impact remaining supportive through 2025.

“The market consensus is that in 2025, there will be a maximum of two cuts in interest rates. That would mean banks would likely report another return on average equity close to 20% again, in line with what we saw last year,” says Lopatin.

Another source of support is the new credit risk management standards introduced by the UAE Central Bank in November, which are likely to strengthen banks’ long-term creditworthiness.

“From a ratings agency perspective, this is positive, as … target banks have to become more prudent in terms of how they classify loans, and how they book provisions against new impairment cases. This means they should be more conservative than they used to be,” says Lopatin.

The standards are aimed at improving the transparency of the banks’ asset quality and ensure stronger provision coverage for problem loans. Consequently, capital and profitability metrics should face less pressure in times of stress, notes Fitch.

“The Central Bank of the UAE targets the sector average impaired loan ratio to be less than 5% in the long-term. The current average is 4%, but we are in the positive part of the cycle,” says Lopatin.

Some banks may report higher Stage 2 or Stage 3 loans ratios due to the new standards, but Fitch maintains its forecast sector-average impaired loans ratio at 4% for 2025 because the impact on most large and medium-sized banks is likely to be limited, and robust growth should continue to dilute increases in Stage 3 loan ratios.

Pressure has been exerted on banks to offload some of their bad loans, most notably in Abu Dhabi.

The process got rolling in 2023, when Abu Dhabi Commercial Bank (ADCB) offloaded a $1.1bn loan portfolio to US investment fund Davidson Kempner, as part of a move to rid its balance sheet of corporate defaults. The lender is now looking to package off more non-performing loans by the end of 2025 and is reported to be in the early stages of studying such a deal.

In January, FAB also announced its intention to offload some impaired loans and is reportedly looking to sell its portfolio of non-performing loans worth about $800m to Deutsche Bank. This process mirrors what is happening in Saudi Arabia, where the authorities want banks to securitise some of the impaired loans.

Opportunities abroad

While the domestic economic upturn and the servicing of GREs’ credit needs will underpin future Emirati bank growth, lenders also continue to look out for new opportunities beyond the GCC home market.

Turkiye is one of the more promising prospects for UAE banks to grow their footprints. Although an attempt last year by FAB to acquire a stake in the country’s fourth-largest private bank, Yapi Kredi, did not go through, in January Dubai Islamic Bank announced an increase in its shareholding in Turkish financial services provider TOM Group from 20% to 25%.

Meanwhile, Emirates NBD and FAB acted as coordinators and bookrunners on a $1.2bn loan for Turkiye Wealth Fund in March of this year. The sovereign fund raised a two-year syndicated loan from 20 banks.

Overseas expansion, mixed with continued domestic credit growth opportunities, should help UAE lenders maintain their recent performances – whatever global headwinds result from US President Donald Trump’s new era of trade barriers.

MEED’s May 2025 report on the UAE includes:

> GOVERNMENT & ECONOMY: UAE looks to economic longevity
> BANKING: UAE banks dig in for new era
> UPSTREAM: Adnoc in cruise control with oil and gas targets
> DOWNSTREAM: Abu Dhabi chemicals sector sees relentless growth
> POWER: AI accelerates UAE power generation projects sector
> CONSTRUCTION: Dubai construction continues to lead region
> TRANSPORT: UAE accelerates its $60bn transport push
 

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James Gavin

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    Although several industries have already suffered – as petrochemicals in general has suffered because of the drop in demand and oversupply in the market – the GCC finds itself in a unique position. Its economies are geared to being market- and trade-friendly, and they have low regulatory barriers, large amounts of space and energy to engage in manufacturing-intensive activities.

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