Professional Documents
Culture Documents
MANAGING
NONINTEREST INCOME &
NONINTEREST EXPENSE
Chapter 3
William Chittenden edited and updated the PowerPoint slides for this edition.
Issues in Interest Income and
Interest Expense
Deregulation in the 1990s lead to an
increase in competition
Average NIM fell since 1992 due to this
increased competition
Net Interest Margins by Bank Asset Size,
19922004
5.0%
4.8%
4.6%
$100M - $B
Net Interest Margins
4.4%
< $100M
4.2%
3.8%
3.6%
3.4%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Issues in Interest Income and
Interest Expense
Core deposit growth has slowed due
to disintermediation
Loan yields have fallen on a relative
basis due to credit scoring and
increased competition among lenders
NIM is being squeezed, so banks must
concentrate more on non-interest
income to grow profits.
Issues in Non-Interest Income and
Non-Interest Expense
Banks must rely less on net interest
income and more on non-interest
income to be more successful
Banksmust grow their non-interest
income relative to non-interest
expense if they want to see net income
grow.
Issues in Non-Interest Income and
Non-Interest Expense
The highest earning banks will be
those that generate an increasing
share of operating revenue from non-
interest sources, like fee income
All fees are NOT created equal
Some fees are stable and predictable
over time, while others are highly
volatile because they are cyclical
Consider NSF charges on checkwriting
Sources of Non-Interest Income
Fiduciary Activities
Deposit Service Charges
Trading Revenue, Venture Capital Revenue, and
Securitization Income
Investment Banking, Advisory, Brokerage, and
Underwriting Fees and Commissions
Insurance Commission Fees and Income
Net Servicing Fees
Net Gains (Losses) on Sales of Loans
Other Net Gains (Losses)
Sale of premises and other fixed assets
Other Non-Interest Income
Safe Deposit, Money Order & Notary Fees
Non-Interest Income is increasing as a
proportion of net operating revenue
Largest contributors are deposit
service charges and other non-interest
income
Largest banks rely more on non-
interest income than their smaller
counterparts
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
Deposit
service
charges
Fiduciary
activities
Trading,
venture cap.
and
>$1B
securitizations
< $100M
Net servicing
fees
Investment
banking,
advisory,
brokerage,
Net gains
$100M-$1B
(losses) on
sales of loans
and other
All Comm. Banks
Net gains
Size as a Percentage of Total Assets, 2004
(losses) on
other assets
Composition of Noninterest Income by Bank
Other
noninterest
income
Non-Interest income is increasing as a
proportion of net operating revenue
Trends in Net Interest Income and Non-interest Income
90% 90%
80% 80%
70%
70%
Net Interest Income
60%
60%
50%
50%
40%
40%
30% Noninterest Income
30%
20% Actual Data Predicted
10% 20%
0% 10%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Deposit Service Fees
Stable source of revenue
Relatively price inelastic
What level of fees is too high given a
banks desire for strong customer
relationships?
Deposit Service Fees:
Non-Interest Checking Accounts
Single-Balance, Single-Fee
No fee if minimum balance is met;
otherwise monthly fee
Account Fee-Only
Monthly fee regardless of balance
plus a possible per-check-charge
Free
No fees of any kind
Fee Structures by Bank Size and Type of
Services, 1999 and 2002: Noninterest Checking
Deposit Service Fees:
Interest-Bearing Checking Accounts
Single-Fee NOW Accounts
No fee if minimum balance is met,
otherwise monthly fee
Single-Fee, Single Check NOW
Account
Monthly fee regardless of balance plus
a possible per-check-charge
No-Fee NOW Accounts
No fees of any kind
Fee Structures by Bank Size and Type of
Services, 1999 and 2002: Interest Checking
Deposit Service Fees:
Special Fees
NSF Checks
Check is returned
Overdrafts
Check is honored
Deposit Items Returned
Stop-Payment Order
Fee Structures by Bank Size and Type of
Services, 1999 and 2002: Special account fees
Deposit Service Fees:
ATM Services
Annual Fees
ATM Card Fees
On us Withdrawal Fees
Fees levied on banks own customers
for withdrawals from the banks own
ATMs
On others Withdrawal Fees
Fees levied on banks own customers
for withdrawals from another banks
ATM
Fee Structures by Bank Size and Type of
Services, 1999 and 2002: Special account fees
The UBPR lists five components of non-
interest expense:
Personnel Expense
Occupancy Expense
Goodwill Impairment
Other Intangible Amortization
Other Operating Expense
Efficiency Ratio
Non - Interest Expense
Efficiency Ratio
Net Interest Income Non - Interest Income
70.0%
65.0% <$100M
Efficiency Ratio
60.0%
$100M-$1B
55.0%
>$1B
50.0%
Dec-04
Dec-03
Dec-92
Dec-93
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-01
Dec-02
Dec-94
Dec-00
Non-Interest Expense:
Operating Risk Ratio
Income
RORAC
Allocated Risk Capital
Customer Profitability
Analyses of customer profitability
profiles suggest that banks make most
of their profit from a relatively small
fraction of customers.
View
is that 20% of a banks customers
account for 80% of profits.
This supports the increase in fees
assessed by most banks over the past
few years.
Customer Profitability 8020 Rule
Customer Profitability:
Expense Components
Non-Credit Services
Check-processing expenses are the major
non-credit cost item for commercial
customers
Transaction Risk
Risk of fraud, theft, error, and delays in
MANAGING
NONINTEREST INCOME &
NONINTEREST EXPENSE
Chapter 3
William Chittenden edited and updated the PowerPoint slides for this edition.