The direct impact of Russian war against Ukraine on the UAE banks is likely to be limited given their limited exposures to Russian and Ukrainian counterparties, S&P said in a special report on the conflict.
But it said there could be an Indirect impact, which could materialize through several channels.
S&P said the higher oil price is likely to further boost confidence and sentiment in the UAE economy. But it said no major change is expected in the macro-picture of further acceleration of lending.
Increased investor risk aversion could be another fallout. Although the UAE banking system operates with a substantial gross external debt position–23% of total assets at Nov. 30, 2021–it has a significant amount of external liquid assets that could be used if banks’ access to external funding is restricted. Moreover, we expect the government to support systemically important banks should the need arise.
The agency says the UAE’s economic activity will accelerate in 2022 due to higher oil prices, supportive government policies, and normalizing non-oil activity. Further deterioration of banks’ asset-quality indicators will remain contained as the economy improves and corporate activity recovers.
Part of the deterioration will come from deferred exposures once the central bank (CBUAE) lifts support measures and companies in still vulnerable sectors are reclassified. Corporates are recovering gradually as economic activity normalizes and the oil price recovers, but sectors such as aviation and hospitality remain vulnerable.
The rise in Dubai real estate prices may slow down because the structural oversupply of residential property could challenge the market over the long term.
The UAE banking sector should benefit from expected interest rate hikes, assuming banks adopt a pragmatic approach for borrowers by not reflecting the rate increase systematically if it could dip borrowers to default.
Similarly, stable and strong capital buffers, good funding profiles, and expected government support should continue to support banks’ creditworthiness in 2022.
Also published on Medium.