UAE lenders pull back on credit growth as GCC downturn reshapes regional banking outlook

The Gulf’s best-capitalized banking system is tapping the brakes — and that says something about where the region’s credit cycle is heading. After years of double-digit credit growth, near-record profitability, and improving asset quality, UAE lenders are pulling back. Underwriting standards are tightening; loan growth is expected to come in well below recent norms; and real estate exposure is under close watch, analysts tell us.

The saving grace is where they’re starting from. “In terms of financial standing, the UAE banking sector has entered this period of potential vulnerability, probably in the best shape in the last 15 years,” Fitch Ratings Senior Director for Bank Ratings Middle East Anton Lopatin tells EnterpriseAM. Non-performing loan ratios are near historic lows at around 3%, while return on equity is close to 20%.

The caution bodes well against the regional macro backdrop. The UAE economy is on course for a contraction this year as part of a wider GCC downturn, with only Saudi Arabia and Oman expected to keep growing in 2026 as the US-Iran war reshapes oil flows and trade.

Measured growth, more prudent underwriting: Lopatin expects loan growth to come in at 8-10% this year — a step down from the post-COVID expansion that drove years of double-digit gains. “The natural opportunities for banks to grow the way they did in the three years after COVID probably aren't there anymore,” he said. The pullback is precautionary — 1Q 2026 results showed most banks holding solid CET1 and liquidity coverage ratios, with many growing bottomlines even as they booked additional provisions.

The strongest institutions are already treating growth more selectively, rejecting opportunities where the return doesn’t justify the capital deployed, and reviewing risk appetite more frequently at board level, Managing Director with Alvarez & Marsal Portfolio Advisory in Dubai Sam Gidoomal tells us. “Lending in a stress environment is not inherently imprudent. What matters is that it is underwritten correctly for the prevailing conditions,” Gidoomal says.

Funding conditions have also shifted. Liquidity indicators came under pressure in the early stages of regional tensions before largely recovering, but the cost of deposits has risen. “Liquidity became more costly — when we talked to banks, they confirmed that competition for liquidity increased,” Lopatin said. The Central Bank of the UAE’s contingency funding measures have helped steady markets.

Building emergency buffers: Several lenders have booked management overlays — extra provisions set aside as a cushion — despite stable impairment metrics. That's a signal of elevated caution, not observed deterioration. “The key discipline is having pre-agreed management action triggers, rather than waiting until buffers are being consumed before deciding how to respond,” Gidoomal explains.

The exposures under watch

Corporate real estate tops the list: Banks have already reduced concentrations from previous cycles, with residential mortgage books looking comparatively clean, but the supply pipeline opening up this year raises the stakes, Lopatin says. A 2026 UBS Bank analysis points to potential oversupply, with up to 110.5k residential units potentially delivered in Dubai this year against a 10-year average of around 27k. A projected price correction of up to 15% across 2H 2025 and into 2026 would test more leveraged secondary developers. Trade finance, tourism, and aviation-linked exposure are also being watched, though system-wide risks there look more manageable.

The missing tool — securitization: A deeper securitization market would let lenders move concentrated exposure off their books rather than just lend more cautiously around it, but the UAE securitization market is still embryonic and mostly private, with an investor base too shallow for public issuance, we previously reported. Meanwhile, Saudi had already changed gear on the market, beginning with mortgages to free up domestic liquidity for homegrown investments.

Not all headwinds…

Margins still have a tailwind: Higher rates continue to support net interest margins, and Lopatin expects that to persist. The US Federal Reserve is widely expected to press ahead with a rate hike before the year-end, with Gulf central banks following on the USD peg. Most GCC central banks kept rates steady last week after the Fed’s decision, including the UAE, Bahrain, and Qatar.

The bigger risk: A combination of weaker fee income, slower economic activity, and rising credit costs if conditions worsen — especially as the non-oil sector continues to feel softening demand and supply chain disruption. “We'll see some deterioration in terms of cost of risk and maybe even asset quality in the coming quarters — but I think it will be gradual,” Lopatin expects.

ZOOMING OUT- What plays out in the UAE is the cleanest read on a cycle the whole bloc is entering. The Emirates went into this downturn with the region's strongest balance sheets, so its banks have the luxury of pulling back from a position of strength — building overlays, getting selective, and waiting it out. Systems with thinner buffers, like Bahrain or Iraq, won't have the same room to maneuver if the GCC contraction deepens.