UAE banks power ahead in Q3, outpacing regional peers

15/12/2025 04:42 AST

UAE banks continued to outperform their regional peers into Q3 2025, supported by strong earnings delivery and sustained non-interest revenue growth. The sector's resilience was underpinned by favorable macroeconomic conditions, including an upgraded GDP outlook and monetary easing that bolstered liquidity and credit demand.

According to Alvarez & Marsal's latest UAE Banking Pulse, the country's real GDP growth forecast for FY2025 was raised to 4.8 per cent by the IMF, reflecting stronger fundamentals. This optimism translated into another quarter of solid banking performance, with aggregate net loans and advances rising 6.5 per cent quarter-on-quarter (QoQ) and deposits expanding by 4.3 per cent. The loan-to-deposit ratio climbed to 77.8 per cent, signaling robust credit appetite relative to funding growth.

Earnings momentum holds firm
Despite a softer interest rate environment following two rate cuts by the US Federal Reserve and the Central Bank of the UAE, banks defended margins effectively. Net interest margin (NIM) edged up to 2.45 per cent from 2.43 per cent in Q2, supported by disciplined asset repricing and strong lending volumes. Net interest income surged 5 per cent QoQ to Dh26.5 billion, while fee and commission income accelerated 7.3 per cent, highlighting banks' success in diversifying revenue streams.

Operating income grew 3 per cent QoQ to Dh41.9 billion, moderating from 5 per cent in the previous quarter due to a decline in other operating income. Nevertheless, net income rose a healthy 4.3 per cent QoQ to Dh23.6 billion, aided by lower impairment charges and tax expenses. Emirates NBD emerged as a key driver of profitability, posting 7 per cent growth in net interest income and 6.9 per cent in fee income.

Return on equity (RoE) improved to 19.6 per cent, up 25 basis points QoQ, while return on assets held steady at 2.1 per cent. Capital adequacy strengthened further, with the aggregate ratio rising to 16.6 per cent, reinforcing the sector's buffers against potential volatility.

Credit cycle gains strength
Loan growth was broad-based, with corporate and wholesale lending-accounting for 57.5 per cent of total portfolios-expanding 7.5 per cent QoQ. Retail loans grew 4.4 per cent, while government lending rebounded sharply by 8.1 per cent. Emirates NBD led the pack with a 10.7 per cent jump in net loans, supported by strong corporate banking performance.

On the funding side, time deposits surged 9.6 per cent QoQ, reflecting depositor preference for locking in higher rates, even as CASA balances dipped slightly. RAKBANK posted the highest deposit growth at 7.4 per cent, while Dubai Islamic Bank contributed significantly with a 6.4 per cent increase.

Asset quality and risk metrics improve
The sector continued to strengthen its asset quality. The non-performing loan (NPL) ratio declined to 2.6 per cent from 2.9 per cent in Q2, while coverage improved to 115.2 per cent. Cost of risk eased to 0.45 per cent, supported by a 6.9 per cent drop in impairment charges. Stage 3 loans fell 5.9 per cent QoQ, underscoring disciplined credit underwriting and effective risk management.

Strategic investments and digital push
Beyond financial metrics, UAE banks accelerated their digital transformation agendas. ADCB announced over 150 AI use cases aimed at unlocking Dh4 billion in value, while Dubai Islamic Bank partnered with HCLTech to drive Shariah-compliant innovation. ADIB launched real-time cross-border transfers to 11 billion endpoints globally, marking a first in the industry. Meanwhile, Emirates NBD expanded its near real-time payment network to 40 countries and acquired a 60 per cent stake in India's RBL Bank for $3 billion, signaling ambitions beyond the region.

Regulatory developments also shaped the landscape, with the UAE's new financial law extending oversight to fintech and digital assets, reinforcing governance and compliance standards.

Investor sentiment mirrored operational strength. UAE banking stocks gained about 30 per cent over the past year, making the sector one of the best performers globally. Valuations remained attractive, with banks trading at an average price-to-earnings ratio of 8.5x and price-to-book of 1.67x, supported by high-teens returns and strong capital positions.

Outlook
The outlook for UAE banks remains broadly positive heading into 2026. Analysts expect continued balance sheet expansion, supported by strong non-hydrocarbon growth and sustained credit demand. While margin pressure may persist amid further rate cuts, banks are well-positioned to offset this through fee income growth, digital innovation, and cost efficiencies from AI-driven initiatives.

Asset quality is likely to remain stable, aided by prudent risk management and robust provisioning. With capital buffers at healthy levels and investor confidence buoyed by attractive valuations, the sector is expected to maintain its status as a regional outperformer-though global liquidity trends and geopolitical risks will remain key watchpoints.

Khaleej Times