The days of guesstimating how many banks sell mutual funds and how important this line of business is to the banking industry are over.
Just-compiled data from the March call reports show which banks are selling funds, what kind of funds they're selling, and the gross contribution of these sales to the bottom line. In the first quarter of 1994, 2,261 U.S. insured commercial banks, or about one in five, sold mutual funds or annuities to their customers. Of that group, the majority (1,166) sold both mutual funds and annuities, 'while 669 sold just mutual funds and the remaining 426 sold just annuities.
Analysis of the data confirmed many of the trends and observations about bank mutual fund sales garnered in previous surveys by trade associations, the media, and consultants. They include:
* Midsize and large banks are more likely than small banks to sell investment products to their customers.
In the first quarter, about 14% of banks with assets of less than $100 million sold mutual funds or annuities, compared with 66% of banks with assets of $1 billion to $15 billion and 100% of banks with assets of more than $15 billion.
* Money market mutual funds are by far the hinds of choice among bank customers.
U.S. banks sold about 10 times as much money market funds as long-term (equity and bond) funds in the first quarter: $97.7 billion versus $9.5 billion.
* Despite the growing importance of this line of business. it still accounts for a small portion of bank revenue. On average, fees and other' income from mutual fund and annuity sales accounted for just under 4% of noninterest income at selling banks in the first quarter.
We still don't know - and the call report can't tell us - if investment products are making a net contribution to the bottom line.
More interesting than these confirmations, however, were the surprises revealed in the March call reports about hank sales of investment products:
* Far fewer banks are actually selling investment products than had been previously estimated. According to the call reports, 1,835 institutions sold mutual funds in the first quarter.
If the annuity sales are added in, the total rises to 2,261. That's far below the 3,000 to 3,500 bank sellers estimated in previous studies.
* Even though bank sales of long-term funds were dwarfed by sales of money market funds in dollar terms, many more banks sold long-term funds than money market funds. In each asset category but the very largest (more than $15 billion in assets), the number of banks selling long-term funds exceeded those selling money market funds by a wide margin.
* Though the portion of noninterest income. accounted for by investment products was fairly low, on average, significant variation existed.
Fifty-one banks - all with assets of less than $400 million and most with assets of less than $100 million - reported mutual fund and annuity income greater than or equal to 20% of noninterest income. More than 500 banks reported ratios of 5% to 20%.
Though these data answer a number of questions about the importance of mutual funds and annuities to the banking industry, the data do have their limitations.
One shortcoming, which has been pointed out by other analysts, is that the data measure gross sales of mutual funds rather than net sales.
The data may overstate banks' involvement because they are not adjusted for redemptions, reinvested dividends, or transfers among funds.
Other problems include lack of differentiation among channels of distribution. Sales of and income from proprietary funds are lumped with sales of thirdparty or private-label funds.
Also, the revenue data may reflect income and fees earned on sales from previous quarters and do not differentiate between income from mutual funds and income from annuities.
And perhaps most importantly, no cost data are available, making it impossible to determine whether these products are profitable for banks that sell them or for the industry as a whole.
This article is based on one that appeared in the summer issue of the Central Banker, the St. Louis Fed's quarterly newsletter.
