UAE and Kuwait banks least at risk from energy transition

Reuters/Morteza Nikoubazl/NurPhoto

UAE and Kuwait banks are the least exposed in the region to the impact of the energy transition away from fossil fuels and towards renewable sources such as wind and solar.

The new research comes as the UAE’s top banks saw profits rise by nearly one-third last year.

As part of the global climate change drive to decarbonise the energy sector, Saudi Arabia and Bahrain have set a net zero target of 2060, while the UAE, along with Oman, is aiming to achieve it a decade earlier.

Ratings agency S&P Global looked at how Gulf banks were exposed to oil and gas, and associated sectors such as mining and quarrying, manufacturing, power generation and public sector lending.

The results found that exposure has “remained broadly stable over the past three years” at around 12 percent, but this varied across the six GCC members.

Omani and Qatari banks are most exposed, at 15 and 13 percent respectively, while UAE and Kuwait banks were lower at 10.8 and 9.6 percent respectively.

Saudi Arabia and Bahraini banks were both at around 12 percent.

The analysis concluded that Emirati banks were less exposed because of the country’s successful economic diversification policies, and Kuwaiti lenders were less impacted as they have significant retail and real estate exposure.

The UAE has also led the way in investing and financing renewable energy projects and, as of the end of 2021, accounted for 77 percent of all renewable energy capacity in the Gulf.

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“How energy transition affects oil and gas prices and investor and customer appetites for carbon intensive sectors and markets will influence GCC banks' long term creditworthiness,” Dr Mohamed Damak, senior director and financial institutions sector lead at S&P Global Ratings, said.

“However, we still believe that certain competitive advantages - such as low extraction costs and the ability to flexibly increase production capacity - position GCC economies well in the global energy transition.”

UAE banks performed well last year with net income at the top ten up by 31.7 percent year-on-year to AED 49.8 billion ($13.56 billion), driven mainly by rising interest rates.

“The overall results of the banking sector are encouraging and we can see the effect of the interest rate increase coming through. Certain profitability and operating ratios are now at pre-pandemic levels,” Asad Ahmed, managing director and head of Middle East financial services at Alvarez & Marsal, said.

The S&P analysis pointed out that the oil and gas sectors remain vital to all GCC economies, and other sectors are directly correlated:

The report said: “When oil prices declined in 2014 and during the Covid-19 pandemic, real estate prices and operating conditions in other economic sectors deteriorated sharply.”

The price of brent oil rose 5.8 percent in 2022, while natural gas was up 14.5 percent.

Yet the price of brent oil has dropped 6 percent in the year to March 14, while natural gas is down 33.5 percent.

A&M reported that despite a great 2022 for UAE banks in the final quarter of the year, profitability began to decrease as rising interest rates began to impact demand for credit, and impairment costs began to rise.

Combined with lower oil and gas prices, A&M forecast that 2023 would be a “sluggish” year for UAE banks, but it was still positive in its overall outlook.

“The UAE banks are sufficiently capitalised to maintain capital adequacy ratio levels well above regulatory requirements,” Ahmed said.