Uncertainties arising from Ukraine invasion threaten Asian banks’ asset quality: analysts
Impact on the financial market will ultimately depend on how events will unfold in the coming days.
Uncertainties arising from the impact of the Ukraine invasion by Russia on the global economy may negatively impact Asian banks’ asset qualities, but there is little to worry about in the near term.
Possible sanctions that will remove Russian financial institutions from SWIFT or impact Russian secondary trading serve as the biggest risks to Asia’s banks, according to Alicia Garcia Herrero, Natixis chief economist for the Asia Pacific.
“If the uncertainty extends over time, it might have some negative impact on banks’ asset quality, all the more so to those countries with close ties with Russia. The most obvious in Singapore since Russian energy companies are present there,” Garcia Herrero told Asian Banking & Finance in an email correspondence.
Overall Asia’s financial markets are generally not very exposed to Russian-related risks.
“We only have Rusal in Hangseng and very few syndicated loans,” she said.
In the near term, uncertainties might just make it unlikely for the US Federal Reserve to hike 50 basis points, even if the 40% hike in gas prices would probably warrant the hike more than before.
How ongoing conflict will affect the financial and energy markets will ultimately depend on how events will unfold in the coming days and weeks, said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management.
“Events in Eastern Europe are unfolding rapidly and have the potential to impact financial and energy markets further in coming days and weeks—much could depend on the specific sanctions and counter-sanctions that are implemented and whether they impact Russia’s overall crude oil supplies and European natural gas supplies,” Bogdanova said in a report on the invasion.
Cyberthreats: a risk to finance?
Russia’s cyberattack network may potentially cause volatility in the investment and even financial space, according to American asset manager Nuveen.
In a report, Nuveen’s global investment committee warned that this has already occurred with Ukrainian government infrastructure, and the attacks could spread to a broader network of countries and targets.
“This growing area of non-military attack should remain a significant risk going forward, and may expand to include areas such as financial services, which is likely to cause ongoing uncertainty,” Nuveen warned.
Currently, Nuveen does not expect the ongoing turmoil is not expected to shift the pattern of a global economic expansion, although market volatility is expected to increase and the market sell-off is likely to persist.
The asset manager advised institutional investors to avoid overreacting and abruptly adjusting their investment plans for 2022.
“Institutional investors should focus on long-term policy objectives, individual investors should remain committed to their portfolio growth and income objectives. All should stick with the broad diversification, asset allocation and portfolio rebalancing plans already in place,” the report read.
“These events certainly bear watching. But from a long-term investment view, they shouldn’t be driving portfolio strategy changes,” it added.
Alternative investments, especially private investments, are expected to remain relatively insulated from the turmoil.
The energy sector has been named as amongst the likeliest to be severely hit by the Ukraine invasion.
Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management, said that energy sector risks are ever-present, especially if sanctions hit the Russian energy sector, or if the pipeline carrying natural gas from Russia, via Ukraine, to Europe is damaged.
“The RBC Capital Markets commodity team points out that there is not enough spare liquefied natural gas capacity to replace Russian pipeline gas should pipeline to Europe be cut off. Furthermore, natural gas storage levels in Europe are much lower than normal—there is little room to maneuver,” Bogdanova warned.
Half of Europe’s energy supplies originate in Russia, and in the interim, global energy prices have grown volatile given the conflict, with oil prices soaring to $100 per barrel, reports by American asset manager Nuveen. “We expect high energy prices to cause further inflationary pressure in the U.S. and globally, even as winter begins to thaw,” the report read.
Apart from the energy sector, uncertainties around the severity of sanctions to be imposed add risks for the equity markets, as well as the agriculture and metals markets, and global economic growth in general, according to RBC Wealth Management’s Bogdanova.