UAE banks turned in a strong first-quarter performance in 2026, with lending growing at its fastest pace in recent quarters even as profitability held firm despite narrowing margins, according to a new report by global professional services firm Alvarez and Marsal.
The findings, which covered the 10 largest listed lenders, found sharpened cost discipline and kept bad loans in check during the first three months of the year. But the report struck a cautious note on what lies ahead, warning that geopolitical tensions which flared up towards the end of the quarter could put pressure on lending, provisioning and asset quality in the second quarter.
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Net loans and advances climbed 5.8 per cent quarter-on-quarter, comfortably outpacing deposit growth of 3.8 per cent. The mismatch pushed the sector’s loan-to-deposit ratio up to 80.4 per cent from 78.9 per cent in the previous quarter, a sign that banks leaned more heavily on their existing deposit base to fund the credit expansion.
The lending surge came even as interest rates fell during the quarter. Net interest income slipped slightly, down 0.3 per cent, as margins were squeezed by recent rate cuts. But banks more than made up for it elsewhere: non-interest income jumped 23.9 per cent, lifting aggregate operating income 7.7 per cent quarter-on-quarter to Dh44.4 billion.
That diversification helped cushion the blow from tighter margins. The sector’s net interest margin dipped nine basis points to 2.37 per cent, as the yield banks earned on credit fell faster than their cost of funding. Yet profitability actually improved: aggregate net income rose 11.1 per cent quarter-on-quarter, pushing return on equity up to 18.7 per cent and return on assets to 2.0 per cent.
Much of that resilience came down to cost control. Banks trimmed their cost-to-income ratio to 27.3 per cent, which A&M attributed to disciplined spending, and to productivity gains from technology investments made in recent years.
The report covered First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Ras Al-Khaimah, Sharjah Islamic Bank and National Bank of Fujairah.
NPL ratio
Asset quality also held up well. The non-performing loan ratio fell to 2.3 per cent and the coverage ratio, a measure of how well banks are provisioned against bad debts, strengthened to 110.0 per cent. The cost of risk improved to 0.56 per cent, though A&M flagged that much of this improvement was driven by loan recoveries at Emirates NBD rather than a broad-based improvement across the sector.
Despite the strong quarter, A&M struck a cautious tone about what comes next.
“UAE banks delivered a strong performance during Q1 2026 with growing balance sheets, improving asset quality, and demonstrating resilient profitability,” said Sam Gidoomal, Managing Director and Head of Middle East Financial Services at A&M.
“However, the geopolitical tensions escalated toward the end of the quarter have increased concerns around provisioning and asset quality going into Q2 2026. We would expect to see some evidence of the impact of the disruption flowing through in Q2 and beyond,” he added.
Looking to the second quarter, A&M expects funding and liquidity management to move to the top of banks’ agendas, as lenders work to protect deposit growth against the risk of outflows tied to regional instability. Whether credit demand can stay resilient in the face of that uncertainty will also be closely watched, alongside the broader trajectory of asset quality and provisioning, which A&M said will hinge partly on how effective Central Bank of the UAE support measures prove to be.
The report also pointed to a growing push by banks to diversify revenue away from interest income towards fees, trading and other non-lending sources, as well as continued investment in digital transformation and artificial intelligence to boost productivity and manage risk. Sustainable finance, it added, is also expected to gain further momentum as banks work towards long-term ESG commitments.
