UAE Central Bank's fees cap may push lenders to raise interest rates

The regulator's move will mainly affect retail banks that may see lower profitability before building volumes

The statement from the central bank follows a six-point agenda by Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, that addressed the issue of Emiratisation. Ryan Carter / The National

The UAE’s Central Bank decision to cap fees and commissions on select banking services may drive some lenders to raise interest rates to cover their risk, banking analysts said.

The regulator’s move will mainly affect retail banks, who may see an initial dent in profits, according to the analysts.  Banks such as Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Mashreq, and RakBank are among the lenders who could be impacted because of their focus on retail operations.

“For banks using higher fees to cover risk, the alternative would be to increase their cost of risk, that is provision expenses, and/or higher pricing of loans,” Monsef Morsy, head of financial analysis at CI Capital in Cairo, said.

The Central Bank announced on Tuesday limits on certain retail banking fees to help protect consumers. Of the 43 capped fees on retail consumer-related banking services listed in the amendment, some fees are merely clarified or amended while others have been introduced for the first time, according to a circular sent to banks and seen by The National.

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Last year, UAE banks were the most profitable in the GCC, netting in $20.4 billion compared to $20.3bn in 2016 as lenders reduced money set aside to cover non-performing loans and cut costs, according to a report by the Boston Consulting Group released in April.

UAE banks were expected to post higher profits this year on the back of robust economic growth and a rebound in oil prices.

The limitations on fees will not hurt profits because most of the banking products have existing fee caps while commissions for UAE banks only comprise about 18 per cent of their total income, according to Mr Morsy.

Under the new rules, in some cases banks must charge lower fees than those prescribed by the caps.

“It is undoubtedly negative for the banks, especially the clause that they cannot charge the maximum cap rate under all circumstances,” Chiradeep Ghosh, banking analyst at Bahrain’s Sico Bank, said. “We would be keen to see whether banks would increase interest rates to offset the lower fees impact.”

Limited fees on bank services such as home loans, late credit card payments, personal loans and car loans will be beneficial for customers and gradually help banks grow their business.

“The decision would have an initial negative impact on banks’ profitability but gradually should help grow volumes and the contribution of non-interest income as a percentage of total income,” Mr Morsy said.

The Central Bank said VAT would be excluded from the new fee caps, adjusting its earlier instructions that banks absorb the tax.

“VAT exclusion will be very positive for banks,” Aarthi Chandrasekaran, vice president at Dubai-based investment bank Shuaa Capital, said.

Retail lending accounts for about 28 per cent of total lending, while total fees accounts for less than one-fifth of revenues, so the impact on retail banks is likely to be negligible, she said.

“However, the impact may be bigger for retail banks such as ADIB whose retail loans share is 62 per cent of total loans and RakBank, whose retail loans is 56 per cent of total loans," she said.

Overall, the fee caps will help to improve supervision on banks, boost transparency and bring standardization to the market, Mr Morsy said.