Banks hoard Fed cuts

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RATES SLASHED: The US Fed rate has been cut seven times since September 2007. (Getty Images)

When the US Fed raised its interest rate by a quarter of a percent in June 2006, HSBC Bank Middle East followed suit, increasing its mortgage lending rate by the same measure.

Since then the Fed has cut its rate seven times in succession bringing rates down by 3.25%. The HSBC Middle East rate has remained unchanged.

The bank's refusal to lower its lending rates has provoked fury from customers who have been waiting for a reduction in their repayments since the Fed started cutting last September.

While HSBC has been hit hard by subprime losses in the US, its Middle East business is booming. The bank set aside US$3.2bn to cover bad loans in the US when it published its first-quarter earnings on May 12. It has also cut some 2000 jobs in response to declining US earnings.

That contrasts starkly with its performance in the Middle East where profits increased "across all of our customer groups and global businesses," according to its latest earnings statement.

HSBC's subprime woe started when it paid about US$15.5bn for Household International Inc in 2003, one of the largest subprime lenders.

In the UAE, the bank is coming under pressure from customers to drop its rates in line with its published conditions.

Aijaz cites last month's AED2.35bn (US$612m) bond sale by HSBC Holdings, the largest conventional dirham bond sale to be sold by any bank, as evidence of how the company is making handsome profits from the difference between how much it pays for its own funds, and how much it charges its customers for home loans.

The five-year HSBC bonds were priced at 70 basis points above the six-month Emirates Interbank Offered Rate known as ‘EIBOR' - the interest rate charged by banks in the UAE for transactions between themselves.

"HSBC has just borrowed US$612m at 70 basis points above EIBOR so the current cost of funds for HSBC in the UAE is approximately 2.7% - keeping a spread of 4.5% to 5.5% is very unjustified," he says.

Darryl Tarr, a pilot who bought his villa in Dubai's Arabian Ranches development is another of the bank's customers who is critical of their refusal to lower rates.

"I'm disappointed they are exploiting the market here," says Tarr, who bought his villa in Dubai three years ago. "They need to wake up."

Tarr says he chose the mortgage because the contract said that the rate was flexible. "Now they seem to have moved the goalposts and they are profiting from this," he says.

James Howard, another Dubai-based homeowner, took out a mortgage with HSBC in 2006 after previously being with Amlak, and has complained repeatedly to the bank over its refusal to lower rates in recent months.

"I think they are rebuilding their balance sheet from the subprime fallout," says Howard, who is considering referring his own case to the Jersey Financial Services Commission, the Channel Islands-based regulator of HSBC Middle East. "There is no way they would get away with this sort of nonsense in the UK."

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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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