New Central Bank rules on retail lending, which come into effect today, are likely to see banks' fee income which total Dh2.33 billion dwindle in the months ahead.
New bank rules may cut fee income for banks
The country's banks collected more than Dh2.3 billion (US$544 million) in fees in the first quarter as earnings from such charges rose sharply ahead of new regulations on retail lending, which take effect today.
Some analysts think the new rules will hurt banks' profitability in the short term.
Five banks accounted for Dh1.6bn, more than half of the income from fees across the sector in the first quarter. The biggest increase in revenue from fees and commissions was recorded at Abu Dhabi Islamic Bank, which almost doubled its income from this segment to Dh111.1m over the first quarter last year.
Double-digit gains in fee and commission income were also recorded at Abu Dhabi Commercial Bank, First Gulf Bank, RAKBank and United Arab Bank.
The new Central Bank regulations on retail lending will limit personal loans to 20 times an individual's salary or total income and restrict the amount of fees that can be generated through other financial products.
Processing fees on loans are limited to 1 per cent of a loan, loan payments are capped at half of gross salary, and credit cards are withheld from those earning less than Dh60,000 a year.
Authorities hope the changes will strengthen the banking sector by limiting lenders' credit exposure to people who may have trouble repaying loans. The aim is to prevent a repeat of the easy lending conditions of the boom years, which left banks with large numbers of bad loans after the global financial crisis set in.
But analysts said bank profits could suffer under the changes.
"These regulations, which are likely a result of widespread consumer dissatisfaction with high fees and hidden costs, are credit-negative for UAE banks, as they will hurt their profitability by deterring banks from lending to certain retail segments," John Tofarides, a financial analyst at Moody's Investors Service, wrote in a recent research note. "For UAE banks, net fees and commissions represent around 33 per cent of their pre-provision income."
Bank executives have been sanguine about their ability to raise income by other means, but analysts are not so certain that fee income can be maintained.
"The banks are generally saying they don't expect to have a hit and they'll be able to make up the difference. But having said that, it shifts the risk towards the downside," said Raj Madha, a financial analyst at Rasmala Investment Bank. "It makes it more probable that they'll end up undershooting their existing numbers."
Across the sector, income from fees and commissions totalled more than Dh2.33bn in this year's first quarter, according to the financial statements of UAE banks that reported earnings last month.
The figure excludes Dubai Islamic Bank and Bank of Sharjah, which did not detail their income from fees and commissions in their financial statements.
Emirates NBD recorded the largest amount of income from fees, at Dh419m, followed by First Gulf Bank.
RAKBank has the largest exposure to the retail sector, generating about 95 per cent of its revenue from this segment.
"We believe this circular [setting out the news rules] might negatively impact banks' fee income generation and also force banks to review their business growth strategies, with less focus on the retail sector," analysts from Nomura wrote in a research note.
Andre Sayegh, the chief executive of First Gulf Bank, recently indicated a desire to develop the bank's asset management and investment banking offerings. First Gulf is one of the most aggressive lenders in the retail sector.