UAE bank lending slows as regional conflict weighs

Lending growth at the UAE’s 10 largest listed banks slowed in the second quarter of 2026 as regional disruption from the US-Iran conflict intensified, while profitability and asset quality remained broadly resilient.

Net loans and advances increased 4.2 per cent from the previous quarter, down from about 5.8 per cent in the first three months of the year, according to the latest UAE Banking Pulse compiled by Alvarez & Marsal. Deposit growth also cooled, to 2.3 per cent from 3.8 per cent, leaving lending expanding faster than funding.

The divergence pushed the aggregate loan-to-deposit ratio to 81.9 per cent from 80.4 per cent, indicating greater use of available deposits to support credit growth. The figures cover First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, RAKBank, Sharjah Islamic Bank and National Bank of Fujairah.

The moderation came during a quarter marked by disruption to trade, travel and business activity across the Gulf as the conflict with Iran affected transport routes and confidence. Alvarez & Marsal said continuing geopolitical tensions and related business disruption had increased concerns over possible deterioration in asset quality and higher provisioning during the second half of 2026.

Operating income across the 10 banks fell 1.2 per cent quarter on quarter to Dh43.9 billion. Non-interest income declined 6 per cent, outweighing a 1.7 per cent increase in net interest income. The cost-to-income ratio consequently rose to 27.9 per cent from 27.3 per cent.

Funding costs also moved higher. The average cost of funds increased by 18 basis points to 3.6 per cent, while the yield on credit rose by six basis points to 9.6 per cent. Net interest margin narrowed by three basis points to 2.34 per cent.

Despite those pressures, aggregate net income rose 2.7 per cent from the first quarter, aided by lower credit impairment charges and recoveries. Return on equity increased to 18.9 per cent from 18.7 per cent, while return on assets held at 2 per cent.

Asset quality remained stable during the period. The non-performing loan ratio stayed at 2.3 per cent, while the coverage ratio eased to 108.8 per cent from 110 per cent. Cost of risk improved to 0.35 per cent from 0.56 per cent, although Alvarez & Marsal said the change was driven mainly by lower provisions at the five largest banks rather than a broad structural improvement.

Capital buffers strengthened slightly, with the aggregate capital adequacy ratio rising to 16.4 per cent from 16.2 per cent. Liquidity measures, however, softened. The liquidity coverage ratio reported by the five domestic systemically important banks fell to 134.3 per cent from 141.6 per cent, while the eligible liquid asset ratio for the other lenders declined to 18.6 per cent from 20 per cent.

Central Bank of the UAE data nevertheless showed continued expansion across the wider banking system by the end of June. Gross banking assets stood at Dh5.59 trillion, total credit reached Dh2.76 trillion and deposits were Dh3.47 trillion. Total credit was 18.1 per cent higher than a year earlier.

The slowdown among the biggest listed lenders did not signal an outright contraction in credit. Central bank figures showed system-wide lending rose by Dh24.7 billion in June alone, almost twice May’s increase, as borrowing remained active across several segments. That expansion underscores the distinction between slower quarterly growth at major banks and continued growth in credit volumes.

The central bank introduced a financial institution resilience package during the regional crisis, giving lenders enhanced access to liquidity and temporary flexibility on liquidity, capital and loan-classification requirements. The measures were designed to allow banks to continue financing households and companies affected by exceptional conditions.

By July 30, repayment deferrals covered Dh13.5 billion of loans held by 135,031 customers. Large companies accounted for Dh9.1 billion of those loans, small and medium-sized enterprises Dh2.4 billion and individuals Dh2 billion.