Banks to focus on fee income for profitability

Banks may be forced to focus more on fee and commission income in order to maintain a decent level of profitability this year, according to the bankers Emirates Business talked to.

While Dubai Islamic Bank (DIB) generated a fee and commission income of Dh545.5 million for the nine-month period ending September 2009, that reported by Emirates NBD was to the tune of Dh1.404 billion. Mashreqbank's fee income improved to Dh1.164bn during the period as against Dh985m for the same period last year, whereas Abu Dhabi Commercial Bank (ADCB) made Dh748.763m on that count. But the heavy provisions rendered ADCB to satisfy with a net profit of only little over Dh700m for the nine-month period.

In the case of NBAD, the net fee and commission income for the nine-month period in the current year at Dh824.610m was marginally lower than that of the same period last year.

Sources said more and more banks would come out with creative ideas to generate higher fee and commission income to boost their revenue stream in the coming quarters. "Needless to say, we will hear banks introducing new fees, and others revising their existing fee structure," sources added.

Cost-cutting will also be one of the key focus areas of the banks in the future. Many banks have reduced their workforce, and according to Central Bank statistics, more than 2300 direct employees in the banking sector have been rendered redundant during the year until August end.

On the one hand, growth in assets, especially in loans, has been flat during the current year, and on the other, majority of the banks will have higher provisions to make and more non-performing loans (NPLs) to disclose.

Sanjay Uppal Group CFO, like many other top bankers, has already mentioned that the NPLs will see a rise in the next few quarters. More importantly, since all the banks have increased their capital and also because the profits are bound to be under pressure for most banks, the return on equity, considered one of the most ideal measures of efficiency, will witness a drop in the current year itself.

The capital adequacy ratio has been steadily improving since 2008-end, and should currently be in the region of 19 per cent compared with 13 per cent as of 2008-end.

During the 11-month period ending November 30, 2009, while the combined assets grew by 6.5 per cent to Dh1.551 trillion, the loans inched up by a mere 3.34 per cent to Dh1.027trn, whereas the deposits grew by 8.66 per cent to Dh1.002trn.

Most bankers believe there will be reluctance to lend among bankers and this is likely to affect the loan growth in the next year also.

Michael Tomalin, Group Chief Executive of National Bank of Abu Dhabi in an earlier interview to this paper said the banks' role as lender is gradually weakening.

"We will see banks taking on the role of arranging and organising deals for corporates and thus the fee income will play a larger role in revenue generation,'' he said.

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