TORONTO, Canada-While credit unions are trying to keep their fees low despite economic pressures, one study shows many banks are having to hike fees.
According to DBRS, here, fee income is often viewed as a stable source of revenue for banks. The past year has proved otherwise, with many banks reporting much reduced non-interest income due to write-downs, trading losses, diminished mortgage banking activity and other negative trends. For small banks, however, fee income in 2008 has remained more stable than for larger banks.
With a preponderance of their income coming from deposit service charges (41% of total fee income, up from 37% in Q2 2008), small banks ($1 billion to $10 billion in assets) showed the most resilience in their fee income. In Q3 2008, total fee income declined modestly (1.7% median) on a quarter-over-quarter comparison, with the median increasing almost 2% on a year-over-year basis. Though the median trading revenue and investment banking and underwriting for small banks declined substantially in the period, these categories did not account for a significant percentage of non-interest income for small banks and thus their declines were not material to the overall trend.
Stability At Small Banks
Stability at small banks reflects two major factors. One, a large portion of their non-interest income consists of deposit service charges, which is the most stable element of non-interest income. This component is larger for small banks (median 41% of total non-interest income in Q3 2008) compared with 31% for those banks with $10 billion to $20 billion in assets, 35% for those banks with $20 billion to $75 billion in assets, and 21% for the largest banks in the DBRS universe (over $75 billion in assets). The high percentage of deposit service charges in fee income translates into more stable fee income. Other sources of non-interest income for banks include fiduciary activities; trading revenue; brokerage commissions; investment banking, advisory, and underwriting revenues; insurance income; net servicing fees; net securitization income; net gains on sales of loans and other assets; and other non-interest income.
The other reason for the relative outperformance from small banks is that smaller institutions don't derive much revenue from the more volatile capital markets segments (trading, investment banking, advisory, underwriting) the way that large banks do. This limits a small bank's upside in good years but also reduces its downside during turbulent times.
The Other End Of The Spectrum
At the other end of the spectrum, large banks (over $75 billion in assets) saw the largest decline in fee income in Q3 2008 (linked-quarter basis) of the four banking groups. This was primarily driven by a reduction in revenues from trading, securities brokerage, and investment banking, advisory and underwriting. The decline in these fee income components offset modest gains in deposit service charges and other non-interest income. Service charges on deposits were the largest contributor to fee income, at 21% of the total (outside of Other Noninterest Income). Other categories that had a significant effect on fee income growth were insurance underwriting (-59% quarter over quarter and -26% year over year) and other insurance income (-7% compared with the prior quarter and -14% on a year-over-year basis).
For medium-sized banks ($10 billion to $20 billion in assets), the trends were more mixed. This group witnessed an increase in the percentage of service charges on deposits as a component of total fee income, from 26% in Q3 2007 to 28% in Q2 2008 and 31% in Q3 2008.
Yet this growth may have reflected deterioration in other sources, as the median non-interest income declined by 4.6% from the prior quarter and 1.3% from the same quarter a year ago.
Medium-sized banks showed modest growth in service charges on deposits, trading revenue (quarter over quarter), and other insurance income. This was offset by a significant decline in other non-interest income.
