Banks hoard Fed cuts

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The US Federal Reserve has lowered its interest rates seven times since September 18, 2007, bringing down the cost of borrowing to just 2%.

The successive rate cuts should have sent mortgage rates tumbling in the UAE as banks benefited from cheaper funding costs. Instead banks including HSBC, Lloyds TSB and Barclays have resisted lowering their rates to below the range of 7.1% to 8.5%.

At his office in Dubai Media City, business analyst Nasir Aijaz produces a binder full of correspondence with HSBC Bank Middle East, a unit of Europe's biggest bank by market value.

His emails relate to why the bank has failed to pass on successive Fed rate cuts on the variable rate mortgage he took out - even as its own borrowing costs have been slashed.

"When I took out my mortgage, one of the best rates available was with HSBC, which was offering 7.25% if I made a down payment of 25%.

My understanding was that if the Fed rate dropped in the future, I would get a better interest rate," he says, citing the terms and conditions of the mortgage published on HSBC's own website.

It states that the bank may change its mortgage rate "based on movements in the USA Fed Funds Rate".

Despite all of his letters to the bank Aijaz has failed to get his interest rate lowered. He has attempted to contact both the UAE Central Bank and the Ministry of Economy's consumer protection unit with his grievances, but has yet to receive a response.

International banks have been attracted to the UAE mortgage market since 2002 when the introduction of foreign ownership rights in Dubai triggered a six-year property boom.

Demand for new properties could top 500,000 units by 2012 with a total transaction value of more than US$190bn, according to research from EFG-Hermes.

The US has been slashing interest rates in a bid to stave off recession in the wake of the subprime mortgage crisis which has led to credit losses and write-downs totaling about US$383bn since last year among the world's largest banks.

Gulf economies including the UAE and Qatar have been forced to cut their benchmark interest rates as the Fed has lowered its own rates, in order to maintain their currency pegs with the ailing US dollar.

Most international banks offering mortgages in the UAE advertise rates of between 7.1% and 8.5% but often require substantial deposits of up to 25% for customers to benefit from the lowest rates available.

This compares to mortgage rates averaging around 5.5% in the US, 2.4% in Japan, and 2.5% in Hong Kong according to financial website www.economywatch.com.

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READERS' COMMENTS

You do the maths
Posted by jc, london on Thursday 13 November 2008 at 15:03 UAE time


I would look at what the rate of your mortgage should be with the current cuts in interest rates and send them a cheque for that value each month. Depending on what type of mortgage you took out. You should in fact be allowed these changes in rates. I strongly feel that the banks caused the problem and now when steps are made to soften the problem their good old fashion greed continues. I would seek legal advice!

GET MOTIVATED
Posted by proactive on Wednesday 18 June 2008 at 13:32 UAE time

Everyone can sit around whining and moaning .. or they can do something about it. Any other industry you can actually take action. So do it with HSBC! Why doesn't everyone get together, take some legal opinion.

CONTRACTUAL FRAUD is illegal, no matter where you live.

HSBC - misleading statements
Posted by nasir, dubai, UAE on Monday 2 June 2008 at 21:53 UAE time

I was already disappointed at the state of affairs at HSBC but after reading Mr Gul's response I think there needs to be a refresher course conducted for all employees of HSBC in basic macro economics, finance and even general knowledge.

The explanation given by Mr. Gul is misleading as well as incorrect. Firstly, all my HSBC mortgage agreement specifies US Fed rate so why should I care about long term dirham interest rates? Even if I consider that mortgages are based on long term UAE dirham interest rates which in any case will be similar to US$ long term rates. EVERYONE knows that dirham is pegged to the dollar and any interest rate whether short term or long term must be same in both currencies otherwise there would be an arbitrage and investors will start borrowing in one currency and investing in the other.

Currently the 5 year long term US Treasury bill is yielding around 3-3.4% (http://www.treasury.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml ) and HSBC’s own 5 year bond is yielding 2.7%. How can Mr. Gul justify charging 7.5-8.5%.

To add fuel to fire (the same fire HSBC customers are burning in) HSBC is giving their depositors a profit rate of 2% on e-saver account and 0.25% on their call deposit and saving accounts. Even HSBC fixed term deposit accounts offer a horribly low rate.

I would request Mr Gul to just check his own banks website, log on to his own account and check the term deposit rates for UAE dirham and US$ term deposits for 12, 18 and 36 months which are exactly the same and as low as they can be. Then again read his explanation and determine how illogical it seems.

Mr Gul you may also need to check EIBOR http://www.nbd.com/NBD/NBD_CDA/CDA_Web_pages/Rates_Charges/eibor_rates if you consider that an indication of long term UAE interest rates.

Just for general information standard chartered is offering a rate of EIBOR 2%+3.75%=5.75% + life insurance +property insurance= 6.25% if I want to get my HSBC loan refinanced which most probably I would do and get rid of this HSBC trap once and for all.

I really appreciate the efforts of ArabianBusiness.com in educating people before they get into the HSBC trap.

High Interest Rates = High Levels of Customer Service?
Posted by RT, Dubai, UAE on Monday 2 June 2008 at 17:34 UAE time


I have a mortgage with HSBC. I not only pay high interest rates, I also get deplorable customer service.

I'd gladly pay a premium price if the services rendered are commensurate with the price premiums.

Having banked in many places in the world from snooty Swiss banks to rural banks in the world's poorest towns. The absolute worst banking service I ever got in the world is from HSBC in the UAE.

Apart from high interest rates, consider:

1--How man times have you had to provide your passport copy to your bank? I provided the exact came passport copy to HSBC when I opened a current account, when I got credit cards, when I got car loans, and when I got a home mortgage. This practice is a ridiculous waste of paper and toner.

2--Why does HSBC need a salary certificate each time I ask for a credit card credit limit increase or when I get a car loan when my salary is directly transferred to them?

3--The blow conversation actually happened when I tried opening an HSBC e-Saver (online only) savings account:

Me: "So what's this e-saver account all about?"

HSBC Jebel Ali staff: "We give you higher interest rates. But you can only withdraw once a month and you have to maintain a minimum balance. We cut branch and tellering costs by allowing you to transact for this account only via online banking.

Me: "That's great, how do I open one?"

HSBC Jebel Ali staff: "when you get home, download the application form. Print it, fill it up, then come back to the branch to submit it.

So much for online only.

Dubai has come a long way for a nation that is only in its 30s. But if it wants to reach the next level towards becoming a truly great city, its hardware upgrades (gleaming towers and impressive physical infrastructure) need to be matched with significant software upgrades (customer service levels, staff attitudes, convenience mindset, etc.).

Cancelling HSBC's local banking license would be a good start. This would rid the national banking market with a horrid service provider and wold get the remaining banks to take customer service levels more seriously.

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