UAE banks are entering a phase of durable, double-digit earnings growth even as pandemic-era credit conditions begin to normalise, according to new research from Bank of America, which says that the sector’s fundamentals remain firmly on solid footing heading into 2027 and 2028.
BofA research analysts Harry Botha and Rahul Rajan expect the cost of risk (CoR) — a key measure of loan-loss provisioning — to tick up from an unusually low 35 basis points in the second quarter of 2026 to around 67 basis points in the third quarter, as the extraordinary boost from recoveries and regulatory support fades.
But even with this expected normalisation, average CoR across 2026-28E is projected at just 62 basis points — comfortably below the 10-year historical average of 81 basis points, underscoring how much healthier bank balance sheets have become. Banks also retain a cushion of overlays worth an estimated 9 basis points of gross loans, or 4.4 percentage points of non-performing loans, that could be released if conditions keep improving.
Asset quality trends continue to strengthen the investment case. Stage 3 (non-performing) loan ratios fell 13 basis points quarter-on-quarter in the second quarter, while Stage 2 exposures — an early-warning indicator — dropped 18 basis points, extending a steady improvement that has been underway since 2022. Provision coverage held broadly stable across the sector, with Abu Dhabi Islamic Bank standing out for a 16 percentage-point year-to-date jump in NPL coverage, driven by a sizeable recovery rather than any deterioration in asset quality.
Against this healthier credit backdrop, the analysts see the broader UAE economy as a powerful tailwind. Dubai’s Purchasing Managers’ Index stayed above the 50 expansion threshold every month from March through July 2026, even amid regional geopolitical tensions — a sign of ongoing business momentum. Even the travel and tourism sector, the only segment to dip below 50 (to 49.8 in May), rebounded to a reading of 50.0 by June and July.
Stay up to date with the latest news. Follow KT on WhatsApp Channels.
There’s also welcome news for savers. The analysts note that banks raised interest rates on retail deposits between June and August 2026, with Emirates NBD leading the way, boosting rates on UAE dirham deposits by 50 to 85 basis points since late May. Banks also sweetened rates more on 12-month deposits than 6-month ones — worth knowing if you’re deciding where to park savings.
Loan growth, meanwhile, is expected to moderate gently from around 15 per cent in 2026 to a still-healthy 10-12 per cent in 2027-28, a slowdown the analysts frame as a positive development that should ease funding-cost pressure across the system rather than signal weakening demand. Government-related and international lending — a particular strength for Abu Dhabi-based banks — are expected to keep driving growth, offering the added benefit of lower capital requirements and valuable cross-selling opportunities even though yields on such loans tend to run lower.
Why does this matter to everyday consumers? A resilient banking sector translates into steadier access to credit, more competitive savings rates, and fewer surprises for borrowers. And the broader economy backing it up looks solid: Dubai’s business activity index stayed in expansion territory every month from March through July 2026, despite regional tensions. Even tourism and travel, which dipped briefly in May, bounced back to healthy levels by summer — a good sign for the jobs and spending that ripple through consumers’ daily lives.
Profitability metrics remain among the strongest in emerging markets. The analysts forecast sector-wide returns on equity holding at roughly 18 per cent in 2026.
Individual stock calls reflect that optimism. The analysts reiterated Buy ratings on Emirates NBD and Abu Dhabi Islamic Bank, citing 16.5 per cent average three-year ROE potential at ENBD and roughly 25 per cent ROE at ADIB, supported by a Dh1.75 billion rights issue announced on August 25 that strengthens its growth funding. Notably, the team upgraded First Abu Dhabi Bank to Buy, forecasting 7.6 per cent compound EPS growth through 2028 and a high-teens return on tangible equity, while lifting its price objective by 10 per cent to Dh23.2 — implying roughly 18 per cent upside.
Looking ahead, the analysts flag several catalysts that could further brighten the picture: the winding-down of central-bank liquidity support measures around September, third-quarter earnings expected in mid-to-late October that may bring upgraded full-year guidance, and continued momentum from Emirates NBD’s expansion abroad, including its completed acquisition of India’s RBL Bank and its July agreement to acquire HSBC’s Türkiye assets.
Taken together, Botha and Rajan’s outlook paints a picture of a banking sector maturing gracefully — trading loan-growth exuberance for steadier, higher-quality earnings, while credit costs settle at levels still well below historical norms. “Stock selection is key,” the analysts note, but the underlying story across the UAE banking sector, they conclude, remains one of resilience, discipline and continued profitable growth.
Looking ahead, a few developments could shape what customers see at their local branch or banking app in the coming months. Emergency liquidity support measures put in place during regional tensions are set to wind down around September, and third-quarter earnings — due out in mid-to-late October — may bring updated guidance for the rest of the year. Meanwhile, Emirates NBD’s recent expansion, including its completed acquisition of India’s RBL Bank and its planned purchase of HSBC’s Türkiye operations, points to UAE banks growing their international reach, which can mean broader services for customers over time.
Source: Khaleej Times