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Banks increasingly look to noninterest income to bolster revenue


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Banks increasingly look to noninterest income to bolster revenue

U.S. banks have generated substantial growth in noninterest income since 2019 as they looked to diversify their fee-based revenue streams, but the overall numbers mask diverging trends over the last year.

After a sharp rise in 2020, noninterest income has fallen at banks with total assets smaller than $10 billion but risen at larger banks. Against a backdrop of rising net interest income in both segments, noninterest income rose 3.5% at larger banks from the first quarter of 2021 to the first quarter of 2022 but fell by 13.2% at smaller banks over the same period, according to S&P Global Market Intelligence data.

Sequentially, noninterest income was up 8.2% from the fourth quarter of 2021 to the first quarter at larger banks, but down 8.5% at smaller banks. Over the same period, net interest income rose 1.3% at larger banks and fell 1.0% at smaller banks.

In the aggregate, U.S. banks' noninterest income rose by 17.2% from the first quarter of 2019 to the 2022 first quarter, while net interest income fell by 0.89% over the same period. Across the U.S. bank space, noninterest income growth has leveled off: Noninterest income totaled $76.6 billion in the first quarter, up from $73 billion at the end of 2021 but down slightly from $76.8 billion a year ago.

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Larger banks have an advantage compared to smaller banks in generating fee income because of their scale, Gary Bronstein, a partner on the financial services team at the law firm Kilpatrick Townsend and Stockton, said in an interview. Investment banking, wealth management, financial technology and cryptocurrency are areas where banks have generated significant levels of fee income, Bronstein said.

"Take a look at some of the banks that have gotten involved in some of the crypto and fintech businesses," Bronstein said. "Those tend to have much higher valuations because they're generating much higher levels of fee income and are much less reliant on interest income."

Diversifying noninterest income through M&A

Some banks have acquired fee-based businesses or other banks with fee revenue streams in order to strengthen the non-interest-income side of their portfolios, while some nonbank companies, specifically in fintech, have purchased banks in order to obtain a bank charter and combine it with their fee-based business.

"Some of the more forward-thinking community banks are looking for ways to partner with nonbank companies to try to generate fee income rather than, for example, having all the infrastructure that's needed for a significant mortgage business," Bronstein said.

National Bank Holdings Corp. sought in April to shore up its noninterest income through two acquisitions: Community Bancorp. and Bancshares of Jackson Hole Inc.

The bank's CFO, Aldis Birkans, said in a statement to S&P Global Market Intelligence that revenue diversification has become increasingly important for banks as inflation, rising interest rates and the possibility of a recession create economic uncertainty.

"Our goal has always been to improve our profitability by providing for more revenue sources than just net interest income," Birkans said.

National Bank looks at potential acquisition targets with an eye toward whether they would support the company's strategic goal of continuing to diversify its fee revenue base, National Bank CEO Tim Laney said during an investor call on the company's acquisition of Bancshares of Jackson Hole.

Laney offered a similar rationale for the Community Bancorp. acquisition during the company's quarterly earnings call, which took place shortly after National Bank announced the deal.

"We fully expect to deliver increased fee income from this impressive capability," Laney said. "When coupled with our recently announced acquisition of the Bank of Jackson Hole, we have added scalable fee income capabilities in the SBA and wealth management areas while expanding into some of the most attractive markets in the United States."

Huntington Bancshares Inc. sought to diversify its fee income through its acquisition of Digital Payments Torana Inc. in May.

"You always want to have a balance between fees to total revenue, but I think that's part of our total discipline," Huntington Commercial Banking Director Scott Kleinman said. "We may or may not be going into a recession. I'll let the experts make the call on that, but having that balance serves us well in all environments."

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