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’ 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?