The UAE banking sector is poised to remain one of the most profitable and resilient in the region in 2026, even as interest margins begin to normalise following several years of exceptional performance, according to a new outlook from S&P Global Ratings.
S&P expects the financial profiles of UAE banks to remain broadly stable next year, underpinned by solid economic growth, strong credit expansion, benign asset quality trends and ample liquidity. While profitability is likely to ease modestly from the peak levels recorded between 2023 and 2025, the rating agency believes earnings will remain structurally sound and well above pre-pandemic averages.
“The sector is entering 2026 from a position of strength,” said Puneet Tuli, noting that strong credit growth, historically low provisioning needs and still-elevated interest margins delivered robust profitability in 2025. “Even as margins come under pressure from lower interest rates, banks should be able to protect their bottom lines through volume growth, diversified income streams and stable credit costs.”
S&P projects UAE economic growth of about 4.7 per cent in 2026, following an estimated 4.5 per cent in 2025, driven largely by the non-oil economy, including construction, financial services, transport, hospitality and manufacturing. Average oil production of around 3.4 million barrels per day is also expected to support hydrocarbon-sector activity. This macro backdrop is critical for banks, as strong domestic demand, population growth and sustained investment flows continue to translate into healthy loan growth and stable borrower profiles.
Against this backdrop, S&P expects lending growth of around 10 per cent to 12 per cent in 2026, only slightly slower than the estimated 12 per cent expansion seen in 2025. Retail lending remains the key driver, supported by rising employment, mortgage demand and personal loans as borrowing costs ease. Corporate credit demand is also expected to stay firm, reflecting infrastructure investment, trade flows and tourism-related activity.
The main headwind for profitability will come from lower interest rates. S&P expects the Federal Reserve to cut rates by about 50 basis points in the second half of 2026, with the Central Bank of the UAE mirroring those moves to maintain the dollar peg.
However, S&P stresses that the impact on earnings should be manageable. “Margins will come down, but from very high levels,” said Mohamed Damak. “Strong balance sheet growth, low funding costs and continued fee income expansion should help offset margin compression, keeping overall profitability healthy.”
Fee and commission income is expected to become an increasingly important earnings buffer. Banks are benefiting from growth in wealth management, payments, transaction banking and trade finance, areas supported by the UAE’s role as a regional financial and logistics hub. Industry data from the Central Bank of the UAE shows non-interest income has grown at a high single-digit pace over the past two years, a trend that analysts expect to continue as digital adoption deepens and cross-border flows rise.
Asset quality is another key pillar of the sector’s resilience. S&P notes that stage 3 loans at the 10 largest UAE banks fell to 2.7 per cent of total loans as of September 2025, down sharply from a peak of 6.1 per cent at the end of 2021. Stage 2 loans have also declined to 3.6 per cent from 6.8 per cent over the same period. Strong profitability allowed banks to build precautionary buffers, lifting provision coverage to 107 per cent, while the cost of risk dropped to 41 basis points from 169 basis points in 2021.
Exposure to real estate, often cited as a potential vulnerability, appears contained. Lending to real estate and construction has declined to about 14 per cent of total credit, from 20 per cent in 2021. While property prices have risen sharply since 2021, S&P believes strong population growth and cash-heavy transactions will limit the risk of a sharp correction, reducing the likelihood of material spillovers to banks.
Capitalisation and liquidity remain clear strengths. The average Tier 1 capital ratio stood at 16.5 per cent as of September 2025, supported by strong earnings and dividend payout ratios below 50 per cent. Liquidity is ample, with cash and money-market instruments accounting for more than 22 per cent of assets at the largest banks, while customer deposits grew by about 15 per cent in 2025 and are expected to remain strong this year.
“Even with some moderation in profitability, we expect UAE banks to remain among the strongest performers in the region,” Damak said, adding that ratings and outlooks across the sector are expected to remain broadly stable through the year.
