UAE banks are tightening lending and building buffers — even as fundamentals sit at 15-year highs

UAE banks are heading into a harder stretch — and they know it. After several years of double-digit credit growth, near-record profitability, and improving asset quality, lenders are pulling back on the throttle: 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,” Senior Director for Bank Ratings Middle East at Fitch Ratings Anton Lopatin tells EnterpriseAM. Non-performing loan ratios are near historic lows at around 3%, while return on equity is close to 20%, and 1Q 2026 results bear that out: Most banks maintained solid CET1 — a core measure of a bank’s financial buffers — and liquidity coverage ratios, and many of them maintained bottomline growth even as they booked additional provisions against the uncertainty.

Now, local lenders are likely entering a period of more measured growth — and more prudent underwriting. Lopatin expects loan growth to come in between 8% and 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 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 will still happen, just likely with a bit more prudence. “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. But the Central Bank of the UAE's contingency funding measures have helped steady markets, and the availability of emergency liquidity support has reassured depositors.

Some banks are already building precautionary buffers. Lopatin noted that 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.

What’s on the watchlist?

Corporate real estate exposure is the most significant asset-quality risk facing the sector, Lopatin says. Banks have already reduced those concentrations significantly from previous cycles, with residential mortgage books looking comparatively clean, but the supply pipeline opening up this year raises the stakes. A 2026 analysis by UBS Bank points to a potential oversupply scenario, 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 the second half of 2025 and into 2026 would test more leveraged secondary developers.

Trade finance, tourism, and aviation-linked exposures are also being watched, though Lopatin says system-wide risks there look more manageable for now.

Some tailwinds could offset the headwinds…

Higher interest rates continue to support net interest margins, and Lopatin expects that to persist. The US Federal Reserve is now widely expected to press ahead with a rate hike before the end of the year — which Gulf central banks, including the CBUAE, would follow given the USD peg.

The bigger risk is a combination of weaker fee income, slower economic activity, and rising credit costs if conditions worsen. The economy is already on course for a contraction, with some pegging it at 5% and others saying it could be as much as 7%, as several economic agencies predict, and the non-oil sector has also been under pressure on the back of softening demand, rising costs, and supply chain disruptions.

“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.