Despite achieving significant profit increases last year, UAE banks are set to face a difficult 2015 as the market grapples with the impact of low oil prices and jittery equities markets.

But the banks’ balance sheets are not going to dramatically deteriorate.

Armed with improved capital adequacy ratios and more diversified sources of revenue, the sector is far better positioned to weather any economic downturn.

Over the past few weeks, the majority of the UAE’s banks have been posting impressive results for full-year 2014, setting new records in terms of net profits and improving their asset quality. The country’s largest bank, Emirates NBD, saw profits leap by 58 per cent, compared with the previous year.

The improving economy in the UAE bolstered banks’ balance sheets last year, with lenders able to reduce their non-performing loan (NPL) volumes.

The more buoyant economy also opened up more lending opportunities, and most financial institutions reported increasing loan portfolios.

Deposits also grew, often faster than credit, ensuring the sector became highly liquid.

But the good times could be temporarily over for the UAE’s banks.

Oil prices have been consistently low for several months. Although the UAE and the wider Gulf region’s governments have not reduced their spending plans, the equity markets are still cautious, with the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) down from the highs seen in mid-2014.

Dubai’s real estate sector also slowed in the last quarter of 2014. Such conditions will make banks more nervous about lending and could see NPL levels creep up again.

But those banks that made use of the good times by making provisions for the bad, will be able to cope with a more difficult 2015.

Follow Rebecca Spong on Twitter: @Rebecca_MEED