UAE banks benefit from US Fed rate rises

Emirates NBD bank reported one of the largest increases in interest income this year. (Reuters)
Updated 18 November 2018
0

UAE banks benefit from US Fed rate rises

  • With the dirham pegged to the US dollar, the actions of the US central bank have a direct impact on interest rates charged by UAE banks
  • With another Fed rate hike potentially on the horizon in December, analysts said the Gulf country’s banks could find it harder to keep ramping up the cost of borrowing

LONDON: Banks in the UAE are reaping the benefits of the US Federal Reserve’s three rate rises so far this year, with healthy increases in net interest incomes helping bolster profits.
With the dirham pegged to the US dollar, the actions of the US central bank have a direct impact on interest rates charged by UAE banks.
The UAE Central Bank last increased its repo rate by 25 basis points and raised interest rates on certificates of deposit on Sept. 26 to bring it in line with the Fed’s earlier move.
With another Fed rate hike potentially on the horizon in December, analysts said the Gulf country’s banks could find it harder to keep ramping up the cost of borrowing for their corporates or individual clients.
“Due to ample liquidity in the system, supported by high crude prices, banks are struggling to pass the rate hikes to customers,” said Chiradeep Ghosh, research analyst at Sico Bank in Bahrain.

 

 “We expect UAE banks to report only a modest (net interest margin) expansion, despite a likely three to four more Fed rate hikes by the end of 2019.”
In the last reported quarter, UAE banks revealed increases in net interest income of varying degrees.
Banks’ profitability is typically driven by net interest income, which accounted for 69 percent of the UAE sector’s total net revenue in 2017, according to a Oct. 3 Moody’s Investors Services report.
Dubai-headquartered Emirates NBD reported one of the largest increases in interest income this year.
The bank posted net profits of 7.7 billion dirhams ($2.1 billion) for first nine months of the year, 24 percent up year-on-year. This increase was supported by 9.5 billion dirhams in net interest income, a 19 percent increase on the previous year. In contrast, non-interest income dropped 2 percent for the same time period.
First Abu Dhabi Bank (FAB) reported smaller increases, with net interest income reaching 9.75 billion dirhams for the first nine months of the year, marginally up by 0.1 percent.
The increase was slightly more noticeable in the third quarter alone, jumping by 1.2 percent compared to Q3 last year, according to its Oct. 23 statement.
FAB said net interest income was “broadly stable” due to “strong business volumes and rate hike benefits,” according to a bank presentation.
Dubai-based Mashreq Bank said its net interest income, combined with Islamic financing income, climbed by 4.5 percent in the first nine months year-on-year to reach 2.8 billion dirhams, according to a Oct. 21 filing.
Analysts said the increase in the banks’ interest-related income has helped to counter some of the risk of rising funding costs looming over banks.
“We expect that rising interest rates will increase system-wide net interest margins as banks’ higher gross yields outweigh the increase in funding costs,” Moody’s said.
Continued rate hikes could, however, start to affect the financing costs for corporate and individual borrowers and be a drag on economic growth, analysts said.
“Rate hikes would definitely dent the borrowing appetite of UAE corporations and the banks would not be left with much option but to lower their spread over interbank rate which they charge corporates,” said Ghosh.
“The capacity of UAE companies to bear higher debt burden would eventually depend on the economic activities in the UAE. A weak economic environment, along with a surge in higher funding cost may lead to pick up in delinquencies,” he said.
Ehsan Khoman, head of regional research and strategy at MUFG, based in Dubai, said the country should be able to absorb the impact of higher interest rates for now.
“Rising interest rates are unlikely to derail the UAE’s benign economic growth outlook in the near-term. The impact of higher rates should be more than offset by government stimulus. Having said that, it’s an additional factor to consider that GDP growth will remain weak by historical standards,” he said.
Some UAE companies have already reported higher financing costs in their latest Q3 results.
The UAE-based United Food Company (UFC) said on Nov. 5 that finance costs paid in the first nine months of the year reached 535,742 dirhams, compared to the lower amount of 364,568 dirhams recorded in the same period in 2017.
Dubai Investments said on Nov. 5 that finance expenses for the first nine months of the year reached 133.6 million dirhams compared to 69.4 million dirhams.

FASTFACTS

BACKGROUND

The US Federal Reserve has hiked interest rates three times this year. It left rates unchanged in November but is likely to make another hike next month.


China summons US ambassador over Huawei arrest

Updated 10 December 2018
0

China summons US ambassador over Huawei arrest

BEIJING: China summoned the US ambassador on Sunday to protest the arrest of a top executive from telecom giant Huawei in Canada, as Washington’s top trade negotiator rejected suggestions that the case could affect talks aimed at settling a trade war.
The arrest of Huawei’s chief financial officer Meng Wanzhou has infuriated Beijing, which demanded Washington drop its extradition request, and stoked tensions during the trade war truce between China and the United States.
Meng faces US fraud charges related to alleged sanctions-breaking dealings with Iran.
But with negotiations underway against a “hard deadline” of March 1 to settle the tariff dispute between the world’s two biggest economies, US Trade Representative Robert Lighthizer said he did not expect the arrest to disrupt the talks.
Meng, the daughter of Huawei founder Ren Zhengfei, is in custody awaiting a Canadian court’s decision on bail on Monday.
Vice Foreign Minister Le Yucheng summoned US ambassador Terry Branstad one day after he called in Canadian envoy John McCallum to voice China’s displeasure.
“Le Yucheng pointed out that the US side has seriously violated the legitimate rights and interests of Chinese citizens, and the nature of the violation is extremely bad,” the foreign ministry said in a statement.
“The Chinese side firmly opposes this and strongly urges the United States to attach great importance to China’s solemn and just position,” it said.
China also urged the United States to “take immediate measures to correct wrong practices, and revoke the arrest warrant against the Chinese citizen.”
The statement warned that Beijing would make an unspecified “further response” in light of the US actions.
In a case which shook investors and rattled the markets, Meng was arrested in Vancouver while changing planes on December 1, the same day that US President Donald Trump and Chinese leader Xi Jinping agreed to a truce in their trade battle and gave negotiators three months to find a compromise.
Although Trump last week tweeted that the talks would end after 90 days “unless extended,” Lighthizer said on Sunday that March 1 is a firm deadline.
“When I talked to the president of the United States he’s not talking about going beyond March,” Lighthizer said on CBS’s “Face the Nation.”
“If there is a deal to be gotten, we want to get it in the next 90 days.”
He also said that Meng’s arrest “shouldn’t really have much of an impact” on the talks, although he conceded that the Chinese might see it that way.
“For us, it’s unrelated” to trade policy matters. “It’s criminal justice.”
Separately, White House economic adviser Larry Kudlow denied reports that Trump was “livid” that the arrest of Meng occurred while Trump dined with Xi.
“He didn’t know,” Kudlow told “Fox News Sunday.” “He learned way later.”
The world’s top two economies have exchanged steep tariffs on more than $300 billion in total two-way trade, locking them in a conflict that has begun to eat into profits.
Since taking office, Trump has waged an often-fierce offensive against Chinese trade practices, which he regularly brands as “unfair.”
He sees the US trade deficit with China as a particular sore point, and the imbalance ballooned to a record $35.6 billion in November, official data showed on Saturday.
Analysts say Meng could become a bargaining chip in the negotiations.
In a bail hearing that was adjourned on Friday, Canadian Crown prosecutor John Gibb-Carsley asked for bail to be denied, saying Meng has been accused of “conspiracy to defraud multiple financial institutions.”
He said if convicted, she faces more than 30 years in prison.
The extradition process could take months, even years, if appeals are made in the case.
Canada has a long-standing extradition treaty with the United States, requiring it to cooperate with US Department of Justice requests to hand over suspects.
Prime Minister Justin Trudeau has said politics played no part in the decision to arrest Meng.
Huawei said Friday that it would “continue to follow the bail hearing,” expressing “every confidence that the Canadian and US legal systems will reach the right conclusion.”
Huawei has denied any ties to the Chinese government, but many in Washington and other Western capitals are skeptical and have raised security concerns.
US federal law already bans military and government use of devices made by Huawei and fellow Chinese firm ZTE.
Influential Republican Senator Marco Rubio told “Face the Nation” that he plans to reintroduce legislation that would ban companies like Huawei from doing business in the US because they “pose a threat to our national interests.”