UAE banks show stability as lending accelerates

By Vriti Gothi

UAE banks delivered a resilient performance in the third quarter of 2025, supported by accelerating credit growth, stable margins and improving asset quality, according to the latest UAE Banking Pulse released by Alvarez & Marsal (A&M).

The report, which analyses the Q3 performance of the country’s ten largest listed banks, shows that aggregate net loans and advances grew 6.5% quarter-on-quarter (QoQ), outpacing deposit growth of 4.3%. This divergence pushed the sector’s loan-to-deposit ratio up by 161 basis points to 77.8%, signalling stronger lending momentum amid a moderating interest rate environment.

Operating income rose 3.0% QoQ to AED 41.9 billion, driven primarily by higher net interest income and fee-based revenues. Net interest income increased 5.0% QoQ, while fee income climbed 7.3%, partially offset by a decline in other operating income streams. Net profit increased 4.3% QoQ, supported by lower impairment charges and reduced tax expenses.

Despite rate cuts during the quarter, sector margins remained broadly stable. Aggregate net interest margin edged up slightly to 2.45%, as steady yields on credit offset rising funding costs. Yield on credit held at 10.9%, while the cost of funds increased 11 basis points to 4.0%, resulting in narrower spreads.

Cost efficiency softened as banks stepped up investment in technology and digital transformation initiatives. The sector’s cost-to-income ratio rose to 28.1%, reflecting higher operating expenses linked to digital and AI-led modernisation programmes. While this weighed on short-term efficiency metrics, A&M notes that these investments are aimed at strengthening long-term operational resilience and competitiveness.

Asset quality indicators improved further during the quarter. The cost of risk declined to 0.45%, supported by lower impairment allowances and stable credit conditions. Overall coverage ratios strengthened to 115.2%, indicating a continued conservative approach to risk management.

Profitability across the sector remained robust. Return on equity increased to 19.6%, while return on assets held steady at 2.1%, underpinned by stable margins and lower credit costs. Capital positions also strengthened, with the aggregate capital adequacy ratio rising to 16.6%.

Sam Gidoomal, Managing Director and Head of Middle East Financial Services at Alvarez & Marsal, said, “UAE banks continued to demonstrate strong earnings momentum in Q3 2025, underpinned by healthy credit expansion, stable margins, and improving asset quality. Despite a lower interest rate backdrop, the sector remains well-positioned, supported by robust macroeconomic fundamentals and banks’ increasing focus on digital and operational transformation.”

The report covers First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al-Khaimah and Sharjah Islamic Bank.

From a market perspective, valuations remain supportive, with UAE banks trading at an average price-to-book multiple of 1.6x and an aggregate dividend yield of 5.0%. A&M notes that sustained profitability, improving asset quality and ongoing digital investment continue to underpin investor confidence in the sector.

As lending activity accelerates and banks balance margin stability with higher technology spending, the Q3 results point to a sector that is adapting to structural shifts while maintaining financial strength.