Currencies in Saudi Arabia and the UAE are pegged to the dollar, and the two countries usually follow interest rate changes made by the US Federal Reserve
Saudi Arabia and United Arab Emirates banks may have their annual revenue estimates cut by one or two percentage points as US interest rates are expected to decline, according to Bloomberg Intelligence.
A 25 basis point cut in US rates will pull down the net interest margin at banks by about 6 basis points, analyst Edmond Christou said in a report on Sunday. The margin is the difference between what a bank earns on assets such as loans and what it pays out on liabilities such as deposits.
Currencies in Saudi Arabia and the UAE are pegged to the dollar, and the two countries usually follow interest rate changes made by the US Federal Reserve. The market is pricing in about a 75 basis point reduction in US rates by year-end, data compiled by Bloomberg show.
Loans make up more than 70% of Gulf banks’ earnings assets that are largely floating-rate corporate facilities, and changes in interest rates have a huge impact on income from lending, according to the Bloomberg Intelligence report.
The net interest margin at Emirates NBD, the UAE’s second-biggest bank, may fall by 12 basis points for every 25 basis points cut in rates, the most among the top four UAE lenders, according to the report.
The net interest margin at Dubai Islamic Bank and Saudi lenders Al Rajhi Bank and Riyad Bank may hold up better.