The UAE’s ten largest listed banks began 2025 with a robust profit rebound. Aggregate net income rose 8.4% quarter-on-quarter (QoQ) to AED22.2bn ($6bn), driven by corporate and wholesale lending, along with healthy deposit inflows. This lifted return on equity to 18.6% and return on assets to 2.1%, despite a 2.1% decline in net interest income, according to a recent report by Alvarez & Marsal.

The IMF cut its 2025 GDP forecast to 4.0% in April, down from 5.1% in October 2024. In contrast, the UAE’s Purchasing Managers’ Index held at 54.7 in Q1, showing non-oil activity stayed on an expansionary footing.

Despite the CBUAE’s rate cuts in Q1, lending appetite remained subdued as the effects of prior tightening continue to weigh on demand.

UAE banks therefore started the year with a cautious stance in terms of mergers and acquisitions. M&A activity was limited to Emirates NBD’s mandatory offer for the remaining 0.11% of Emirates Islamic Bank at AED 11.95 a share. Emirates NBD also received approval to begin due diligence on a $1bn acquisition of Egypt’s Banque du Caire aligned with Cairo’s IMF reform programme.

The report notes the UAE economy will be supported by strong non-oil activity and diversification efforts but remains constrained by extended Opec+ output cuts and ongoing conflicts in major oil-importing nations.

Aggregate interest income dropped 5.8% QoQ, while fee and commission income surged by 18%, and impairment charges declined sharply by 59.3%, highlighting a shift toward fee-generating services and improved asset quality.

Credit growth was driven by corporate and wholesale lending, with net loans and advances rising 3.6%. Deposit growth outpaced lending, increasing 5.8% driven by a 7.6% jump in current and savings account (CASA) balances, bringing the loan-to-deposit ratio down to 74.7%.

Cost efficiency improvements helped offset margin pressures. Operating expenses fell 7.8% QoQ, reducing the cost-to-income ratio to 28.2%, the lowest in a year despite a 15 basis point compression in net interest margins to 2.52%, following central bank rate cuts.

Asset quality also improved significantly. The cost of risk declined 45 basis points to 0.29%, non-performing loans dropped to 3.2% of gross credit, and coverage rose to 110.5%, supported by recoveries and prudent provisioning.

Stage 1 loans increased by 3.9% QoQ, while Stage 2 and 3 exposures declined, reflecting better credit health.

Banks also cut costs and broadened revenue streams through a wave of digital launches: the UAE’s first domestic card scheme, Jaywan, went live with broad acceptance; ADCB rolled out its Meedaf fintech venture using AI and blockchain; Emirates NBD added crypto trading to its Liv X app in partnership with Aquanow and Zodia Custody; and Tap Payments secured a CBUAE licence to boost its commercial payments business.

Cross-border and corporate partnerships also gained pace: Dubai Islamic Bank raised its stake in Turkiye’s TOM Group to 25%; Commercial Bank of Dubai and Emirates NBD integrated JP Morgan’s Liink for faster cross-border payments; and Abu Dhabi’s ADQ, IHC and First Abu Dhabi Bank plan a dirham-backed stablecoin as the UAE deepens its crypto investments.

Real estate and construction lending grew modestly, rising to 14.4% of gross loans from 14.0% in Q4 2024, in line with Dubai’s buoyant property market. Q1 real estate transactions in Dubai reached $31bn, up 23.1% year-on-year, while Abu Dhabi’s volumes grew to $6.9bn, marking a 34.5% increase.

The global banking sector outlook remains uncertain amid prospects of a trade war concerns about potential trade tensions, a slowdown in the global economy and volatility in crude prices.