Bank deposit rates have fallen and could fall further, leaving the onus on savers to find a decent rate of return.
Banks prepare to battle for customers
An expected drop in deposit interest rates may have a ripple effect for consumers as institutions try to tempt customers to switch banks. Gregor Stuart Hunter reports
War is looming in the retail bank industry, with many UAE banks laying plans for new branches and product offerings to tempt customers to switch sides - but the first casualty could be the rates of interest paid on bank deposits.
With the improving health of the banking sector leading to falling Emirates Interbank Offered Rates (Eibor), many industry experts believe that interest rates paid on bank deposits could be due to plunge.
Eibor is the interest rate at which UAE banks lend to each other and is similar to the London Interbank Offered Rate (Libor).
Since the start of the year, six-month Eibor has dropped to its current rate of 2.36 per cent, its lowest poiny in almost 12 months. This is down from last September's rate of 2.49 per cent.
A large gap has also emerged with USD-Libor, the equivalent interbank rate for the US, which tends to dictate the movement of Eibor.
Jaap Meijer, an analyst at AlembicHC Securities, says this could precipitate a fall in Eibor rates - and with it, a slide in rates of interest paid on consumers' bank deposits.
"You'll generally see a close correlation," Mr Meijer says. "Typically, if Eibor rates drop by 1 per cent, you'd see the deposit rates come down by 0.5 per cent."
However, with the turnaround of the country's banking sector after a turbulent year of restructuring and write-downs, some banks can now afford to offer lower rates of return on deposits.
"The need to gather deposits is becoming less urgent," Mr Meijer says. "Liquidity has substantially improved, so the need for deposits has waned a bit."
But whether that will lead to an immediate decrease in deposit rates depends greatly from bank to bank.
"It depends on how your competitors react to each other," says Mr Meijer. "No one bank wants to be the first to offer lower interest rates and scare off its customers."
The banks are keenly aware of the dangers of lowering rates too soon. According to a recent study by Ernst & Young, more than one in every five UAE residents plans to switch bank accounts in the next year because of shoddy customer service.
But some banks have shown reticence to engage in combat for each others' customers at a retail level.
"We will not go into a price war for loans or deposits and [we'll] charge a fair price for the loans we make," says Michael Tomalin, the chief executive of the National Bank of Abu Dhabi. "It's been a consistent strategy."
Faisal Al Qasimi, a 27-year-old employee of a technology company who lives in Abu Dhabi, says he recently switched banks because of "appalling" customer service at an international lender.
He says he invests rather than deposits his cash because the interest rate is so low. "Even if they were to double it, it wouldn't be appreciable," Mr Al Qasimi says.
He says he could be induced to switch bank accounts if interest rates were more competitive.
"That would be an incentive, but another disincentive would have to be the massive bureaucracy to do anything with banks."
However, at a time of rapid increases in the cost of living, the last thing anyone wants is to see their savings eroded by inflation after going through the hassle of switching bank accounts for a better rate.
Even thrifty savers must keep a close eye on their finances if they do not wish to see their savings dwindle.
"That's the problem that retail investors have, certainly compared to a year ago," says Gary Dugan, the chief investment officer for private banking at Emirates NBD, the UAE's largest bank by assets. "Interest rates have fallen ... and generally we're aware that inflation is picking up around the world.
"The cost of living is going up. You have to find some more return from somewhere."
Riskier investments, such as equities or high-yield bonds, may prove more enticing to savers in the coming year. Investment banks are tipping equities in emerging markets outside of last year's star performers: Brazil, Russia, India and China.
"We prefer emerging market equities, particularly in high-growth Asian and Latin American markets," according to the latest report from RBS Coutts, the private UK bank. "We expect these areas to continue to benefit from loose monetary policy in the West and from strong inflows of foreign capital.
"Stock performance within the major emerging markets is likely to reflect attempts by policymakers to rebalance their economies away from exports towards domestic consumption."
Meanwhile, Goldman Sachs is tipping countries such as Turkey, Poland and Qatar to outperform this year.
For those whose tastes swing towards commodities rather than companies, the investment bank has also predicted gold to continue its ascent. The price of a troy ounce of gold has risen 21.2 per cent to US$1,369.80 (Dh5,028) over the past 12 months, with even higher peaks earlier this year. But Goldman recently predicted that the yellow metal would rise to $1,690 before the year's end.
Not everyone shares that optimism, but commodities are increasingly being touted as an important part of savers' portfolios.
"We don't expect to make a lot of money out of gold," says Mr Dugan. "But it's a very good secure asset to be holding. When everything goes wrong, your gold holding is appreciating in value. It's a good diversifier of risk."
Currencies are also worth considering for Gulf-based expats, who often send money home in their own currencies. But the home currency can make a big difference to the value of savers' nest eggs over time.
The euro is a case in point, falling 38.55 per cent against the dollar during the first six months of last year as worries about Greece, Ireland, Portugal and Spain mounted, before rebounding to almost the same level by November.
With exchange rates having moved sharply over the past year amid talk of "currency wars", it can be hard to know which currency is the best choice for this year.
But Emirates NBD would be "quite comfortable" advising clients to hold their savings in US dollars, Mr Dugan says.
"We're seeing the US economy showing the greatest upwards surprise of the G7," he says. "We also believe that the dollar is somewhat undervalued."