Falling interest rates to benefit banks, not customers

Benchmark interest at 11-month low but improving credit conditions for lenders are unlikely to be passed directly to borrowers.

While banks are borrowing more cheaply, that cheaper money is not necessarily being passed on at lower interest rates to their mortgage-buying customers.

The cost of interbank borrowing has fallen to its lowest level in almost a year as confidence builds within the UAE's banking system, but bank customers may not see the benefits of a thaw in credit markets.

Data from the UAE Central Bank showed the Emirates Interbank Offered Rate (Eibor) has reached its lowest since last February, with six-month Eibor rates at 2.3725 per cent. The one-month and two-month levels also hit their lowest point since that time.

Easy availability of credit before the global economic downturn encouraged companies across the Emirates to take on large amounts of debt and led to a wave of debt restructuring among some of the country's biggest conglomerates.

Banks have been reluctant to lend since then, even as the wider economy has revived. Despite the latest decline in banks' borrowing costs, analysts say consumers are unlikely to reap the rewards any time soon.

Naveed Ahmed, a financial analyst at Global Investment House in Kuwait, said: "We should see banks being cautious and opportunistic towards lending in 2011. And we don't see lending rates coming down, at least not to a noticeable level, in 2011."

But analysts said the falling Eibor rates were a positive signal for the UAE's banking system and would help to reduce borrowing costs for companies, in turn boosting the country's economy.

Raj Madha, a financial analyst at Rasmala Investment Bank, said: "Liquidity is coming into the system. The prospect of risks for individual banks has decreased."

Part of the increased liquidity has come from a rise in bank deposits, Mr Madha said. Between September and November, bank deposits surged 3.6 per cent to Dh1.04 trillion (US$283 billion) as customers increased total deposits by Dh36.5bn, according to data from the UAE Central Bank.

However, with a long-standing and wide gap against the much lower US dollar London Interbank Offered Rate (Libor), the equivalent US measure, the UAE's dollar peg should compel Eibor lower as lending conditions improve.

Gary Dugan, the chief investment officer at Emirates NBD Private Banking, said retail investors might see returns on their savings accounts dwindle as Eibor falls.

"It's not fanciful to believe that interest rates could fall 0.25 to 0.5 per cent within the year," Mr Dugan said. "Eibor is coming down, which will mean that though investors will always want a precautionary amount of cash, I think they'll say that if they're only getting 2 per cent on their deposit account and they're feeling more confident, they might start to invest in equities."

Mr Ahmed said a number of positive signals on the UAE's economy, including falling US-dollar Libor rates and progress on the restructuring of debt at Dubai World and Dubai Holding, were helping banks to access credit.

But Mr Madha added that banks should not expect profits from the difference between high loan rates and suppressed Eibor rates.

What banks want "is high but falling interest rates. We're getting to the point where they benefit from falling rates, but their low actual rate is a challenge for them", he said.

Mr Madha said the outlook for the banking sector was stabilising, pointing to the new Central Bank regulations on provisions for bad debts.

"It suggests increased confidence in the banking sector," he said. "If they're being more cautious on non-performing loans, then that's a good thing."