Rising interest rates could pinch bank customers in the UAE following US Fed's decision to hike rates in March 2017 and with more hikes expected this year and the next, according to a new report.
"Customers will find their borrowing costs rising as a result of the Fed rate hike in March 2017, and further rate hikes are possible through 2017 and 2018. Banks, on the other hand, will need to reprice their loan books to reflect the rate hike by the UAE Central Bank, in line with the dollar," said the UAE Banking Federation's latest report released on Sunday.
The UAE's Central Bank has pegged its currency to the US dollars and follows interest rate policy of the Federal Reserve.
The report, however, warned that the local banking sector could face challenges in 2017.
"UAE banks with the most liquidity will see their margins go up. In the longer term, the rate hike will trickle down, affecting auto, personal and home loans and credit cards rates. Rising interest rates, however, may not necessarily impact deposits immediately. Banks will need to manage their costs, especially if they foresee weaker credit demand due to higher rates," it noted.
Rising interest rates in 2017 are expected to further amplify liquidity pressures on banking in the UAE, it added.
Another issue facing the industry is regulatory compliance with Basel III requirements and IFRS9, which will increase costs. Banks also need to adapt to fiscal changes by studying the impact of the introduction of the VAT. As a result, UAE banks will need to optimise their business processes at the same time that they meet these requirements.
"Expectations for the UAE banking system remain modest although UAE credit growth is expected to pick up in 2017. It is projected that there will be signs of improvement in banking performance given growing investments in the non-oil sector, particularly led by the governments of Dubai and Abu Dhabi," the report noted.
According to "Annual Report 2016," oil prices are expected to further recover owing to the Opec agreement to cut oil production. If Opec manages to maintain this cut throughout 2017, oil prices are at less risk of further decline, which could mean that government demand for credit could decrease. It would also increase the likelihood of larger government deposits, as indicated by the positive correlation of government deposits and oil price growth in 2016.
It noted that the larger government deposits will eventually lead to a more liquid banking system that can further support the UAE economy.
The report noted that overall regulatory framework is improving but high credit risk remains worrisome and de-risking is becoming a trend.
AbdulAziz Al Ghurair, Chairman of the Federation, noted that despite the global economic slowdown and plunge in oil price impacting overall growth, the UAE banking sector has remained largely resilient and robust.
"2016 has been an outstanding year for the UAE Banks Federation. We were able to considerably sway the direction of the UAE banking sector towards a more conducive and purposeful direction. Member banks were able to receive comprehensive guidance on key initiatives, from raising industry standards and enhancement of customers experience to promoting financial literacy and Emiratisation."
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