The investment banking group, GFI Hermes, said that the significant rate cut, announced by the US Federal Reserve, affects the outlook for Gulf banks ’earnings.
The group’s report added that the Federal Reserve’s interest rate cut by 50 basis points, ranging from 1 to 1.25% in an emergency step to protect the US economy from the impact of the Corona virus, is a measure prior to the next policy meeting scheduled on March 17-18.
The investment bank summarized his view on the impact of the decision on Gulf banks below, noting that the banks in Saudi Arabia and the UAE are more oriented to keep pace with the reduction than they are in Kuwait and Qatar, where the central banks in the UAE, Saudi Arabia and Qatar reduced interest rates by 50 basis points after the Federal Reserve’s decision And Kuwait followed yesterday with 25 basis points.
The financial group said that the Central Bank of Kuwait reduced interest rates by 25 basis points, noting that the Kuwaiti dinar was linked to an undisclosed basket of currencies, and thus the Central Bank of Kuwait has more flexibility in its monetary policy than other Gulf Cooperation Council countries.
Reducing the interest rate by 25 basis points on lending and deposits in our estimates may have a negative impact and reduce the combined returns by approximately 1.5% on the total profits.
Our analysis assumes a decrease in asset yields and financing costs. However, we note that from today we realize the reduction in the discount rate from the Central Bank of Kuwait, or the standard for pricing lending.
The Central Bank of Kuwait has another criterion or guide to deposits, which is the corresponding price, which we believe it is possible that the Central Bank of Kuwait will also reduce it, but the Central Bank does not issue press releases for interest rates.
In the current environment, smaller Kuwaiti banks are struggling to increase their balance sheets and enhance their competitiveness to provide financing. Consequently, we see the negative impact on profits will be slightly greater if smaller banks continue to price deposits, especially those with huge amounts.
The banking group considers that the inclusion of the Kuwait Stock Exchange on the MSCI Emerging Markets Index on May 28th is an additional incentive for the Kuwaiti financial market.
The EFG-Hermes Group said that an analysis of the impact of the interest rate cut on Gulf Cooperation Council countries indicates that the sensitivity of profits will range between 3% and 8% as follows:
Kuwait: The interest rate reduction of 25 basis points by the Central Bank of Kuwait on the assumption that it includes interest rates on lending and deposits will lead to a 1.5% reduction in total profits.
SAUDI ARABIA: The Saudi Arabian Monetary Agency reduced interest rates by 50 basis points, and therefore we expect to estimate an overall 8% decrease in profits generated from net interest income, and mortgage growth should partly offset the lower interest rates.
UAE: The Central Bank reduced interest rates by 50 basis points, and therefore we estimate a total decrease of 7% of the profits generated from the net interest income.
However, the central bank is taking measures including rescheduling loans to ease the potential stress caused by the emerging corona virus.
The group says that Kuwait and Qatar have the lowest negative risks related to declining profitability and its complications among Gulf banks, and that these complications should continue to decline in the short term due to pressures of net interest income on the one hand, and the possible slowdown in regional economic growth on the other hand, with the possibility of an economy affected The United Arab Emirates, especially Dubai, is slowing the number of tourist arrivals.