It wasn’t long ago that fee income was a key driver of banks’ quarter-over-quarter earnings growth. With rock-bottom interest rates suppressing profits on loans, banks relied heavily on fees from activities like trading, brokerage and mortgage refinancing to make their numbers.
In recent quarters, though, the tables have turned. At many banks, net interest income is now growing at a double-digit pace thanks largely to rising interest rates, while fee income has essentially remained flat. And judging by fourth-quarter earnings results, it’s a trend that appears to be accelerating.
Of the midsize to large banks that had released results as of Wednesday, many reported solid growth in interest income when compared with the fourth quarter of 2016 while showing little to no growth in fee income. At the $26.2 billion-asset Webster Financial in Waterbury, Conn., for instance, net interest income increased 10.6% in the fourth quarter, while noninterest income fell 6.5%. Fee income at the $31.2 billion-asset Synovus Financial in Columbus, Ga., was skewed by some one-time events, but core banking fees declined by 6.9% year over year.
Bankers and analysts are citing a myriad of reasons for the slowdown in fee income. Large banks have seen steep declines in trading revenue due to a lack of volatility in the markets and rising rates have slowed demand for mortgage refinancing, which is often a key driver of fee income. Some are also taking losses on securities sales tied to the new tax law.
Making matters worse is that fees from service charges on deposit accounts have barely budged over the last several years. Banks have struggled to recoup income they lost after Congress capped interchange fees on debit card purchases for banks with more than $10 billion of assets and required banks to be more transparent about their overdraft policies. Many banks have also made their own changes to overdraft programs that have gone a long way toward improving relations with customers but have eaten into fee income.
Bankers and analysts seem optimistic that fee income will bounce back, though it is hard to know when or what might drive a comeback. Many regionals, including Synovus and the $104.2 billion-asset Huntington Bancshares in Columbus, Ohio, have been refining their approaches to wealth management and are counting on those efforts to boost fee income down the road.
Others expect to generate fees from niche businesses they run or may be biding their time until mortgage demand — suppressed somewhat by a combination of higher rates, tight inventory and, according to many bankers, onerous regulations — rebounds.
Among the biggest challenge banks face on the fee side is figuring out how to generate more income from service charges on deposit accounts.
In the third quarter, banks collected $9.2 billion in service charges, down from $9.3 billion in the same quarter a year earlier and up only slightly from the $9 billion they collected in the third quarter of 2015, according to the Federal Deposit Insurance Corp. Fourth-quarter data will not be available until April, but a number of banks, including Fifth Third Bancorp in Cincinnati and BOK Financial in Tulsa, Okla., have said that total fees from service charges declined in the quarter when compared with the same period in 2016.
This leveling off has coincided with decisions made by many banks to change the way they process checks from highest to lowest to the order in which they came in. Reordering is decidedly more consumer-friendly because it results in fewer overdrafts, but it has come at a cost to banks’ bottom lines, said Brian Klock, a managing director at Keefe, Bruyette & Woods.
The task of generating more fees from service charges is perhaps even greater at smaller and regional banks, many of which have seen deposits decline or grow only slowly, in part because millennials appear to favor large banks that are seen as having slicker technology.
Klock said he wouldn’t be surprised to see some banks reinvest their savings from the recent cut in the corporate tax rate into digital channels in a bid to hold on to existing customer relationships or develop new ones.
“Banks are going to be working hard and investing into every type of product they can to try to help drive some of this fee revenue, and some of them are going to be willing to give it away because there’s a tax benefit they’re getting that could help fund that,” he said. “I think it’s still going to be a pretty challenging year.”
Given those obstacles, perhaps the most promising area of fee-income growth for regional banks is in asset and wealth management.
Fifth Third CEO Greg Carmichael said that he expects overall fee income to increase by as much as 6% in the year ahead, as the bank continues to make investments in wealth management and related businesses. The company last year bought several nonbank businesses focused on insurance, investment advice and consulting, in an effort to bulk up its fee-generating capabilities.
At Synovus, fiduciary and asset management fees climbed by 7.1% to $21.8 million in the fourth quarter, and Chris Marinac, director of research at FIG Partners in Atlanta, said he expects this growth to accelerate in the years ahead.
“It’s an area they know, they have good emphasis there, and they have done a better job of winning business in major cities like Atlanta and Birmingham,” he said.
At the $32.3 billion-asset BOK, higher revenue from activities such as brokerage and asset management helped to offset declines in fees from deposit service charges and mortgage banking in the fourth quarter. The bank’s wealth division posted record revenue in 2017 as it surpassed $80 billion of assets under management and administration.
Scott Grauer, the executive vice president for wealth management at BOK, said on the bank’s earnings call Wednesday that increases in assets under management in 2017 should translate into higher trust fees this year.
“Longer term,” he added, "the retirement of the baby boomers and the transfer of nearly $6 trillion of wealth to their heirs is one of the most powerful trends facing the wealth management industry. We are well positioned to benefit with a diverse set of products and services to meet the needs of the next generation.”
Kristin Broughton contributed to this story.