Fee income at banks dipped in the third quarter, but the upward trend is expected to resume in the new year, when a surge in capital markets activity is expected.

Results for individual banks were mixed. Banks that rely heavily on trading, investment banking, and mortgage activity for fee income reported declines, but those with rapidly growing processing and servicing operations showed increases.

Though fee income fell 2.1% among 18 large-capitalization banks during the quarter, it was still up 20% from the same period a year earlier, according to data compiled by the Salomon Smith Barney unit of Citigroup Inc. The same trend was reflected among 26 mid-cap banks, with fee income down 1.8% from the second quarter yet up 14.7% from the year earlier.

The reason for the slowdown: Banks were hard-pressed to repeat the big gains they had recorded in capital markets and mortgage refinancings in the second quarter.

With the slowdown in the equities markets, trust and asset management fees dropped, said Jason Goldberg, an analyst at Salomon. And higher interest rates stopped the steady stream of bank fees from refinancings.

Noninterest income as a percentage of revenue at large-cap banks declined quarter to quarter, to 45.5%, from 45.9%. That compares with a similar drop among mid-caps, to 31.2%, from 31.4%.

The drop is expected to be temporary.

"Banks are interested in getting into any business they can charge a fee for," said David Allaire, co-adviser to the Imperial Bank Fund, a portfolio of 35 bank stocks managed by Retirement Planning Co. in Providence, R.I.

"Fee income at banks is going to continue to grow," he said, "and it's a good thing for shareholders" because it makes banks less sensitive to interest rate changes.

A number of banking companies already derive more than 50% of their revenues from noninterest income. Fee revenue at both Pittsburgh's Mellon Financial Corp. and Chicago's Northern Trust Corp., which operate big securities-processing businesses, accounted for 68.5% of each company's revenues. Companies where fee income is greater than 50% of revenues include Bank of New York Co., Chase Manhattan Corp., and PNC Bank Corp.

Several regional banks bucked the quarter-to-quarter downtrend in fee income. Minneapolis-based U.S. Bancorp reported a 6.1% increase, to $696 million, attributed in part to fee growth from its payment system unit, which processes and services credit cards and government purchasing cards.

Milwaukee-based Marshall & Ilsley Corp.'s quarter-to-quarter fee revenues grew 8.8%, largely as a result of its extensive data processing activities. Columbus, Ga.-based Synovus Financial Corp.'s fee income rose 6.3%, mainly on growth at its credit card processing unit, Total System Services Inc.

In trading on Wednesday, the American Banker index of the top 50 banks slipped 1.4%, to 627.4, and the American Banker 225 fell 0.8%, to 862.3.

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