Sweden’s currency selloff may be about to save the central bank

DUBAI: Abu Dhabi is engineering a second bank merger in its latest attempt to stay competitive in the era of lower oil prices.

Three of its state-linked banks are in talks to combine into an institution with US$110bil of assets, according to Abu Dhabi Commercial Bank PJSC (ADCB), one of the lenders.

The negotiations follow a tie-up between Abu Dhabi’s two biggest banks last year and the merger of sovereign wealth funds in March.

“This is entirely consistent with the moves over the last few years towards tighter financial control and elimination of duplicated costs in Abu Dhabi Inc,” said Hasnain Malik, the global head of equity research and strategy at Exotix Capital in Dubai.

The shares of ADCB and Union National Bank PJSC (UNB), the two listed banks in the potential deal, surged by the daily limit of 15% at open in Abu Dhabi.

As oil prices settle at a new normal that’s barely enough to balance budgets in the Gulf Cooperation Council, Abu Dhabi, home to 6% of global crude reserves, has stepped up efforts to create leaner and more competitive financial institutions.

It doesn’t have much choice. There are almost 50 banks operating in the United Arab Emirates serving a population of about 9 million. Compare that with Saudi Arabia’s 28 lenders catering to 33 million people, and it’s not surprising that analysts have been saying for some time the industry is ripe for combinations. Even the merged lenders are comparatively small globally.

In the latest deal, listed lenders ADCB and UNB are considering combining with privately held Al Hilal Bank to create the fifth-largest bank in the GCC.

An agreement could be reached as soon as this month if talks are successful, two people with knowledge of the talks said earlier, asking not to be identified because the discussions are private.

ADCB confirmed were under way in a statement released after Bloomberg’s initial story. It said the discussions were “currently at a very preliminary stage and may not result in a transaction.”

In the spring of 2017, a two-way merger produced First Abu Dhabi Bank with US$188bil of assets, surpassing even Saudi Arabia’s largest lender in size.

“With a megabank they will have the balance sheet to compete,” said Richard Segal, senior analyst at Manulife Asset Management Ltd in London.

“This will send a strong signal to other countries in the region that are overbanked, to move forward more quickly.”

While Brent crude touched four-year highs near US$80 a barrel this year, forecasts show it’s unlikely to sustain these levels in the next few years.

UAE growth slowed to 0.5% last year, well below the 4.9% annual average between 2000 and 2014, according to data compiled by Bloomberg. — Bloomberg STOCKHOLM: As Sweden’s krona plunges to its lowest point since the financial crisis, the central bank may finally get the economic setting it needs to start raising interest rates.

Riksbank governor Stefan Ingves and his colleagues will be watching the exchange rate closely when they meet this week to discuss monetary policy in the biggest Nordic economy. Their announcement is due tomorrow, just three days before a national election that could upend the status quo in Swedish politics.

All 24 analysts surveyed by Bloomberg expect the bank to keep the main rate at minus 0.5%, but the weak currency is likely to shape any forward-looking comments.

“The krona is so weak today that it’s absolutely a parameter that will be weighed in,” said Annika Winsth, chief economist at Nordea AB, the biggest Nordic bank. For now, “underlying inflation is so weak,” that there wouldn’t be a rate increase this week, she said.

The Riksbank will discuss the future of monetary policy as Sweden girds for what is set to be one of the most consequential elections in its history. The nationalist Sweden Democrats – a party that wants the country to leave the European Union – is poised to win almost 20% of the vote.

The party’s ascent has made it more difficult for the two main political blocs to form a viable government, and the uncertainty surrounding the election outcome is a key reason for the selloff in Sweden’s currency.

A weaker exchange rate raises the price of imports and drives up inflation. It also feeds Swedish economic growth by making exports cheaper.

But according to Winsth, “the Riksbank is probably worried about the weak krona.” She says that “when the election is over next week, some of the krona weakness we are currently seeing could quickly disappear and weak service inflation and weak underlying inflation may become more in focus again.”

Recent data show that the Riksbank’s long struggle to revive inflation is far from over. While headline price growth has been close to the 2% target for more than a year, inflation excluding energy has slowed to a 17-month low. Price growth on services, something closely watched by policymakers, is at its lowest since 2015.

The Riksbank’s board was split at its most recent meeting, with two members arguing for a rate hike right away, or in September, while the other four wanted to wait until next month or December.

First deputy governor Kerstin af Jochnick – who has consistently been one of the most dovish board members together with deputy governor Per Jansson – said last month that it was “very good” that headline inflation is now more than 2% and that the weak krona is likely to have an impact further ahead.

But she also said she wanted to see more evidence that inflation gains are being felt across the broader economy.

“We want inflation to stabilise around 2%, and we can see that inflation pressure has been moderate for some time,” af Jochnick said after a speech. — Bloomberg