Competition for govt dollars ongoing among some banks

Treasury managers in local banks meet

KUWAIT CITY, May 5: An intense competition has been ongoing for a while among some banks to attract government’s dollar deposits, specifically the money of Kuwait Investment Authority through its pricing at very high rates compared to the prices traded by most banks, as the war on the dollar reached a rate of 1.1 percent above the price of Libor that led to the opening of a bank lintel, reports Al-Rai daily.

Few days ago, treasury managers in Kuwaiti banks met. A major item listed on their agenda was concerning granting government deposits to some banks at exaggerated rates, which reached 2.3 percent two weeks ago for a period of three months compared to the current price, which is slightly lower for most banks by about 1.2 percent.

What is worth noting here is that the pricing of deposits is not related to the financing price curve, which is estimated at an additional margin of three percent above the current discount rate of 1.5 percent.

Margin

The interest curve on deposits is governed by other considerations, provided the pricing is at an additional margin above the Libor.

According to sources, the banks blamed some of their colleagues for pricing government deposits at high rates, which approximate specifically at 2.5 percent, even the financing rates currently granted by them. They considered this as being contrary to their policy of attracting deposits according to competing mechanisms that guarantee stability, so they called for re-legalizing pricing again.

It seemed from the discussions in this regard that some banks directed towards offering high prices on their customers’ deposits compared to the market.

It was driven by the desire to compensate the withdrawals of the Public Institution for Social Security, which again returned some time ago to withdraw from its funds with the banks, by not renewing some of the deposits whose deadlines were set, in an effort to reinvest it outside the banking system.

He indicated that liquidation of some of its deposits led the banks to increase their movement towards attracting deposits from other customers in an effort to fill the gap left by these withdrawals.

Effects

This is in addition to effects of the decline in deposits in the recent period due to disruption of most economic activities, in exchange for an increase of its withdrawals while facing repercussions of the Corona crisis.

There is also another consideration that prompted some banks to increase their activities and prices to attract dollar deposits. Before a period of time, the Central Bank of Kuwait decided to reduce liquidity ratios in line with the repercussions of the Corona crisis and the economic developments that took place, in a move that received wide banking approval.

However, as a caution, some banks sought to securing its dollar positions, in order to avoid a situation whereby the Central Bank of Kuwait will revert at any time to work with the old liquidity ratios.

Although these fears are not justified in terms of oversight, on the basis that any future decision by the Central Bank in this regard will ensure gradual implementation and taking into account conditions, in a manner that does not cause panic from rearranging the scale of benefits in the future. But the concerns of some banks have prompted them to take precautionary moves before agreeing to calm prices and not to exaggerate.

In banking, the intensification of competition towards attracting deposits does not mean that the bank suffers from lack of liquidity.

Funds

It goes without saying that all local banks enjoy high levels of surplus funds and are competing to employ them at the Central Bank while paying higher rates to customers.

Perhaps what confirms durability of liquidity in all local banks is the rates of coverage of bonds and securities’ instruments offered by the Central Bank from time to time to reorganize bank liquidity, which sometimes exceeds what is offered ten times. What drives the banks to raise the cost of money on them?

In principle, some banks are forced to bear an additional cost on the deposits of their customers if they need more than others to rearrange the scale of their entitlements as specified by the Central Bank and the accounting instructions in this regard. In front of that, they resort to courting government bodies from the pricing window in a way that guarantees them attracting high levels of liquidity, especially stability.

However, this situation faces implicit refusal by banks that are stable in their liquidity ratios, and which do not suffer any pressure in arranging their maturities, except that in practice these banks are not entitled to complain about their competitors with the Central Bank under the pretext of offering them higher prices.

What might prompt the regulatory regulator to interfere in the pricing of deposits and reorientation is that banks offer low prices compared to the rates in circulation. This had already happened in previous times during which the Central Bank was directed not to go down in pricing to low rates, as it set an additional margin for dinar deposits at the rate of an additional point price for the rates given on the bank money that attracts to regulate liquidity in the form of bonds and securities.

In the case of raising prices, this is a banker affair intended to compete for deposits in a manner that leads to providing better prices to the customer, and this usually does not raise the need for the Central Bank to intervene unless competition turns into a reality harmful to the deposit market.

In the face of this, most banks did not find a way to calm deposit prices except by blaming each other on decent pricing of government deposits, where a “gentleman” agreement was reached among the treasury managers to restore their accounts again in a way that ensures pricing of funds within the price range included to them.