When Russia invaded Ukraine on February 24, 2022, it was the first large-scale war of aggression in Europe since World War II. Unimaginable to many, the conflict also brought many unexpected impacts that have reverberated across the globe.
The greatest economy in the Arab world, the Saudi Arabia Kingdom, had a little increase in annual inflation in June 2022, from 2.2 percent in May to 2.3 percent. According to Jadwa Investment, the Russia-Ukraine war-related increase in food costs around the globe is expected to push Saudi Arabia’s inflation rate for 2022 to 2.4% this year.
Rating agencies expect that improving economic conditions combined with higher interest margins and a decline in provisions will improve the overall profitability of UAE banks. The four largest banks, First Abu Dhabi, Emirates NBD, Abu Dhabi Commercial Bank, and Dubai Islamic Bank, which account for 78 percent of UAE banking assets, reported a combined net profit of $8 billion, up 31 percent from $6 billion in 2020, according to Moody’s.
According to S&P Global Ratings’ latest UAE Banking Sector 2022 Outlook, the impact of the Russia-Ukraine conflict on the UAE banking system is expected to be “limited for the time being.”
“The UAE’s economic activity will accelerate in 2022, due to higher oil prices, supportive government policies, and normalizing non-oil activity,” according to the report authored by Mohamed Damak, the senior director – of Financial Services, and Puneet Tuli, an associate at S&P Global Ratings.
Based on the report, the UAE banking sector will benefit from expected interest rate hikes, assuming banks take a prudent approach toward borrowers.
Stable and strong capital buffers, good funding profiles, and anticipated government support should keep banks creditworthy in 2022.
Corporates are gradually recovering as economic activity normalizes and the oil price rises, but industries such as aviation and hospitality remain vulnerable.
The rise in Dubai real estate prices may slow because a structural oversupply of residential property may pose a long-term challenge to the market.
Increasing investor risk aversion and the price of oil are two other factors that the report claims could have an indirect effect.
Although higher oil prices are probably going to help the UAE economy’s confidence and sentiment, even more, no significant shift in the macro-picture of continued lending acceleration is anticipated.
The UAE’s economic expansion may spur lending growth, though this possibility is muted by the anticipated rise in interest rates, which may impede lending growth in the second half of 2022.
The UAE banking system, which operates with a sizable gross external debt position, has a sizable amount of external liquid assets that could be used if banks’ access to external funding is restricted due to investor risk aversion.
“Moreover, we expect the government to support systemically important banks should the need arise,” the report added.
Strong capital buffers supported the banking sector despite lower profitability in 2020–2021, demonstrating that capitalization is still strong.
“With the anticipated increase in profitability, we expect banks to further strengthen their capital buffers. We think banks will start paying dividends at pre-pandemic levels from 2022, as profitability improves,” the report added.
Deposit growth for banks could be considered moderate. Because private corporations and retail depositors prioritized saving over spending in a still difficult operating environment in 2021, overall deposit growth increased.
According to the report, the banking sector’s deposits will increase slightly in 2022 as the economy continues to improve and corporate cash flow generation becomes more robust.
A higher return on deposits under a higher interest rate environment could hasten deposit growth.
The SRB intervened in the European operations of Sberbank, Russia’s biggest lender, which looked set to fail due to a run on deposits after Russia invades Ukraine. A second Russian bank, VTB, continues to operate in Europe because, unlike Sberbank, its largely Germany-based depositors had not fled. The SRB requires banks in the EU to issue a set amount of special debt that can be written down in a crisis to replenish depleted capital without the need for taxpayer bailouts. There were no worries that banks won’t meet a 2023 deadline for special debt issuance, SRB officials said, but banks need to continually be on guard as existing debt expires over time.
Banks in the UAE, Saudi Arabia, and South Africa will remain relatively insulated from the fallout of the Russia-Ukraine conflict due to limited dealings with Russian and Ukrainian counterparties while Turkish and Tunisian banks are most likely to suffer from the negative indirect effects, S&P Global Ratings said. For the UAE banking sector, the conflict is likely to have a limited impact for now, given their limited exposure to Russian and Ukrainian counterparties.
Egypt’s bank sector remains exposed due to the country’s significant reliance on staple food imports, the report stated, which added that government support could be vital to mitigate the damage to the nation’s economy. Ukraine and Russia accounted for approximately 85 percent of Egypt’s wheat imports in 2021. Higher food prices lifted inflation to 8.8 percent in February 2022, prompting the Central Bank of Egypt to increase interest rates — for the first time in years – by 1 percentage point.
According to S&P, UAE banks are expected to record an increase in lending this year as the Arab world’s second-largest economy charts a strong recovery from the Covid-19 pandemic. UAE banks’ funding structures benefit from strong core-customer deposit bases and limited reliance on external funding. The higher interest rate environment means a higher return on deposits, which could further accelerate deposit growth. However, it would inevitably rise the cost of funding as some deposits migrate to interest-bearing products from no-or low-interest-bearing products. Strong capital buffers continue to support the UAE’s banking sector. With the anticipated increase in profitability, S&P analysts expect banks to further strengthen their capital buffers. Some banks have raised additional capital in the form of Tier 1 instruments over the past couple of years to benefit from existing rates.
