How have UAE and Saudi banks been affected?

Banks in the United Arab Emirates and Saudi Arabia remain relatively insulated from the fallout from the Russian-Ukrainian conflict due to their limited relationships with the region, according to S&P Global Ratings.

“The conflict will have a limited effect on the banking sector in the UAE, for now. Rated UAE banks have minimal direct exposure to Russian or Ukrainian counterparties. We do not expect to see any significant direct effects from the conflict on their asset quality indicators,” the ratings agency said in a report this week.

“The government has significant capacity and willingness to provide support if needed,” he said.

Lenders in Saudi Arabia, the largest economy in the Arab world, share a similar outlook.

“Rated Saudi banks have little direct exposure to Russian or Ukrainian counterparties. We do not expect to see any significant direct effects of the conflict on their asset quality indicators,” the report states. “Banking system growth is fueled by Vision 2030 mortgages and business loans.”

GCC banks stand to gain from higher energy prices and higher interest rates which will significantly improve their results as the cost of risk continues to fall amid economic growth in the region, the rating agency said last month.

Brent crude prices, which soared a notch below $140 a barrel earlier this year, have since fallen but are still trading above the $100 mark. If the war in Ukraine continues, average oil prices could hit $135 a barrel this year, Japanese lender MUFG Bank said.

Rising oil prices will improve economic and fiscal prospects in Saudi Arabia and the United Arab Emirates, S&P said in its latest report. This, in turn, will support the prospects for banks in the two largest economies in the Arab world.

“We expect the Saudi economy to continue its rebound in 2022, supported by higher oil prices and recovery in production volumes. The non-oil economy is likely to benefit from Vision 2030 projects and related spending,” did he declare.

An increase in benchmark interest rates will also boost bank earnings.

On March 16, the central banks of the United Arab Emirates, Saudi Arabia, Bahrain and Kuwait raised their benchmark interest rates after the US Federal Reserve raised its key rates to contain inflation, which has reached a 40-year high in the world’s largest economy.

In the UAE, lenders’ net income will rise 15% and return on assets will rise 1.4% for every 100 basis point (bp) increase in interest rates, S&P said.

Rated UAE banks have minimal direct exposure to Russian or Ukrainian counterparties

S&P report

Despite rising interest rates, loan growth is expected to accelerate, supported by economic growth in the United Arab Emirates, with real gross domestic product expected to grow by 3.8% this year, according to the report.

Meanwhile, Saudi banks will see an average increase of 11.5% in net income and 1.1% in return on assets for every 100 basis point increase in interest rates, the agency said.

“The banking sector [in the kingdom] is in an overall net foreign asset position, with limited reliance on external financing due to a large domestic deposit base and historically small overseas operations,” the report said.

“We expect 2022 to bring stability, supported by growing loan portfolios and an improving economic environment.”

Some lenders in the Middle East and Africa region will be hit by some of the main indirect effects of the conflict, the rating agency said. These include higher oil prices, higher food prices leading to inflationary pressures and current account deficits; and heightened investor risk aversion, which could increase the vulnerability of banking systems with substantial net foreign debt, the report said.

Updated: April 05, 2022, 06:10

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