A healthy economic growth and upbeat corporate sector imply good prospects in 2014 for the UAE banking sector, Standard & Poor's said in a report.

Real estate prices in the UAE have been recovering since late 2012, mainly in Dubai, and banks' credit losses are gradually retreating, the agency underscored. Credit growth has picked up over the past six months and the trend will provide banks with another year of strong financial performance, according to S&P. Such positive parameters support the UAE banks stable rating outlook, it added.

Still, the key risk factor to watch over the next 24 months will be developments linked to certain large debt restructuring transactions, S&P said. Potential default on these debts could increase some banks' provisioning requirements, consequently reducing their profitability.

S&P reckoned that while the supply of credit continues to increase, “it remains to be seen whether banks will manage to avoid the pitfalls that led to the costly boom and bust cycle in 2002-2008.”

The asset quality of the UAE banks will continue to improve, although the cost of risk is unlikely to reduce further, according to S&P. Banks' strong funding levels and good-quality capital will help them cope with adverse market developments, such as tighter liquidity and higher funding costs.