Are UAE banks displaying irrational exuberance?
The recent rush by UAE banks to lend at lower interest rates to corporate borrowers has been criticized as ‘irrational exuberance’.
Click here to add Abu Dhabi Islamic Bank as an alert
Disable alert for Abu Dhabi Islamic Bank,
Click here to add Alan Greenspan as an alert
Disable alert for Alan Greenspan,
Click here to add Ben Bernanke as an alert
Disable alert for Ben Bernanke,
Click here to add Dubai Duty Free as an alert
Disable alert for Dubai Duty Free,
Click here to add Dubai Government as an alert
Disable alert for Dubai Government,
Click here to add Emaar as an alert
Disable alert for Emaar,
Click here to add HSBC as an alert
Disable alert for HSBC,
Click here to add Jebel Ali Free Zone as an alert
Disable alert for Jebel Ali Free Zone,
Click here to add marginsDubai government as an alert
Disable alert for marginsDubai government,
Click here to add Nakheel as an alert
Disable alert for Nakheel,
Click here to add Tirad Mahmoud as an alert
Disable alert for Tirad Mahmoud,
Click here to add US Federal Reserve as an alert
Disable alert for US Federal Reserve
The recent rush by UAE banks to lend at lower interest rates to corporate borrowers has been criticized as ‘irrational exuberance’ by Tirad Mahmoud, CEO of Abu Dhabi Islamic Bank in The National today.
After taking advantage of a recovery in UAE bond prices to replace expensive debts with low cost bonds the corporate sector has also been in a position to elbow down the interest rates charged by UAE banks on local borrowings.
Squeezing bank margins
Dubai government-controlled companies like Emaar, Nakheel, Dubai Duty Free and the Jebel Ali Free Zone have all negotiated lower borrowing costs on some $5 billion of debt over the past few months, noted the newspaper.
Mr. Mahmoud said ADIB has not been taking part in this tough competition for new business. It certainly leaves the banking sector open to a squeeze on profit margins if interest rates were to suddenly surge higher, and is bad news for margins in any case.
Global interest rates have been on the way up this year, particularly following comments about the Fed winding up its quantiative easing program by chairman Ben Bernanke a couple of months ago.
For Dubai government-controlled entities it is only good business to refinance at low cost while they can. It’s a window of opportunity that is now closing. However, Mr. Mahmoud is right that the banks may live to regret it. HSBC has not participated either.
That said for the UAE economy as a whole this refinancing exercise is only good news and will help the borrowers through what are probably tougher times ahead for the global economy. Perhaps the UAE corporate sector is a better buy than local bank stocks.
Real estate recovery
Another global financial crisis would not hit the UAE nearly as hard as it did last time when it precipitated a deep local real estate crash. Nobody is that overstretched this time and mortgage lending is actually down on a year ago.
UAE banks may be guilty of chasing business at poor margins but it is hard to sustain the idea of ‘irrational exuberance’ which is usually associated with economic bubbles like the Nasdaq for which Fed chairman Alan Greenspan coined this term in 1996.
Still he was also a bit premature in his comments as the Nasdaq bubble inflated for another four years. Will the UAE be the same?
- Yemen Central Bank headquarters to relocate from Sanaa to Aden
- Show me the money: Lebanon addresses bank transfer delay problems
- Swiss Leaks revisited: Strong Egyptian presence in banking scandal
- Saudi market plans IPO in 2018
- Understanding the ripple effect: 8 reasons the US economy has slowed down in Q1 of 2015