Slow growth in interest revenue is forcing banks to rely more on fees and service charges to remain profitable, and financial reports for the first quarter of 2006 show those banks in Rhode Island that have built strong non-interest income sources came out on top.
Those banks reaped profits from debit and credit card charges, wealth management fees, mutual fund sales and investment banking income, among other sources – all revenue streams that depend very little, if at all, on interest rates.
“For banks, non-interest income is becoming a very important source of income,” said Keith Leggett, a senior economist for the American Bankers Association. Bankers have sought more non-interest income for decades, he said, yet shrinking profits on deposit accounts gives their effort a greater sense of urgency.
Banking executives and experts attribute lagging profits on deposit accounts to the scant difference between interest rates on long-term and short-term debt. This flat yield curve decreases banks’ profit margins on interest-bearing accounts.
For Washington Trust Bancorp, the purchase last year of Weston Financial Group in Wellesley, Mass. boosted non-interest income on wealth management fees and security sales during the first quarter.
The Westerly-based parent of The Washington Trust Co. reported last week that the Weston acquisition was the leading cause of a 56-percent jump in non-interest income in the first quarter of 2006 compared with the same period last year.
“For probably the last 10 years that I’ve been here we’ve talked about the most important thing for us is maintaining a balanced stream of earnings,” said John C. Warren, chairman and CEO of Washington Trust, “and part of that balance includes lines of business like wealth management to produce income.”
Though Washington Trust’s interest income increased a modest 5 percent during the quarter, the bank reported a 12-percent gain in profits in the quarter compared with the first three months of 2005. In a statement, Warren last week credited an 83-percent increase in wealth management fees and trust revenue for the $2.4 billion bank’s successful quarter.
At Charlotte, N.C.-based Bank of America Corp. – which has the second-highest market share in the state – customers increased debit card use and the recent acquisition of MBNA added to a profitable quarter.
Terry H. Francisco, a spokesman for the bank, wrote in an e-mail that debit and credit card revenue grew 26 percent to $3.4 billion in the first quarter of 2006 compared with the same period last year. The increase, he said, was “primarily driven by a 24-percent increase in purchase volume resulting from account growth.”
One reason for the growth is the bank’s “Keep the Change” program, in which customers receive automatic transfers into their savings accounts every time they use their debit cards. As a result, interchange fees – generally a 1- to 2-percent charge to the merchant when the debit card is used – have grown.
Bank of America reported a 14-percent increase in first-quarter profit. Non-interest income totaled $8.9 billion compared with $6.03 billion during the first quarter of 2005. In addition to buying MBNA and increased debit-card usage, the bank said the gain was due to greater amounts of service-fee income, trading account profits and investment banking revenue.
According to the Federal Deposit Insurance Corporation, the average bank with more than $1 billion in assets last year got 42.6 percent of its total income from non-interest revenue. And banks without that mix of income have paid the price.
Take Bancorp Rhode Island, the Providence-based parent of Bank Rhode Island, which took in 17.25 percent of its revenue from non-interest sources in the first quarter, according to Marie van Luling, spokeswoman for the bank.
Merrill W. Sherman, president and CEO of BankRI, said that the lower-than-average percentage of non-interest income is due to the fact that the decade-old bank is relatively young. The bank added to its non-interest income stream last year with the purchase of Macrolease, an equipment leasing company in New York.
BankRI reported a 37-percent decrease in profits last quarter, with $1.5 million in net income compared with $2.4 million during the same quarter last year. Much of the decrease was attributed to an $868,000 charge due to actions of a former employee, but higher interest expenses were also behind the lower earnings, according to the bank’s quarterly report.
The ABA’s Leggett said that banks can expect the flat yield curve to keep putting pressure on interest revenue for the rest of the year and beyond. Also, interest rates will suffer due to higher demand for debt from baby boomers as they retire and switch from investing in mostly stocks to more bonds.
“What I think we need to recognise that we are into a low interest rate environment,” Leggett said. Thus, banks will continue looking to mutual fund sales and wealth management services for profits, he said, and “this is becoming a much more important source of revenue.”
