Analysis: How Much of the Rate Cycle Reaches the Margin?

Executive Summary

Net interest margin is the most direct channel through which monetary policy reaches bank earnings, yet only a fraction of the rate cycle actually arrives. Across four CBUAE rate cycles since 2017, the weighted average NIM of the five largest UAE banks captured just a tenth to a quarter of each policy move: the 235-bps COVID-19 cut compressed NIM by 53 bps, while the 500-bps hike of 2022-24 lifted it by only 60 bps. The 2017-19 tightening was the exception, with NIM falling 15 bps despite 125 bps of hikes, as elevated post-2016 funding costs and the FGB-NBAD merger weighed on margins. Funding mix explains most of the dispersion between banks, with CASA-heavy ADIB and ENBD gaining the most in the last tightening cycle and wholesale-funded FAB and ADCB compressing the least in the current easing cycle. Gulf banks lend at floating rates and fund at near-zero cost, which is a bet on interest rates whether consciously placed or not. The question for treasurers is not whether to hedge, but whether this is the bet the bank wants to run.