Aust bank fees down but revenue pressure for banks

Yet for bank investors the survey illustrates again the revenue pressures in the industry.

Over several years now earnings growth in the sector has come from declining charges for bad and doubtful debts - a trend which has continued to positively surprise - and solid cost discipline. Revenue growth has been the weak link and what the fees survey shows is that even as volume growth improves, there is not the same tick up non-interest income.

As the RBA noted, “banks’ fee income from both households and businesses rose moderately in 2013. However, deposit and loan fees have declined as a ratio to the outstanding values of deposits and assets, respectively”.

Having spiked up in 2005 and again following the financial crisis, bank fees as a percentage of total fees and commissions have been in gradual decline since 2011. Meanwhile, bank fees and commissions as a percentage of operating income have flatlined since the GFC at around 30 per cent, having declined from a peak of 46 per cent in 2002.

Bank margins – the profit banks earn on their loans and deposits – have also been in structural decline, from 280 basis points for the four major banks in 2002 to 210 basis points by the end of the March interim results.

According to KPMG’s analysis of the interim profits, non-interest income rose 0.22 per cent to $12 billion in the March 2014 survey, with fees and commissions followed by wealth management and insurance the major contributors.  Net interest income meanwhile increased 3.8 per cent to $52.9 billion.

Again while lower margins and fees are obviously good news for customers who are paying less for financial services – according to the Australian Bankers’ Association, the proportion of household spending on bank services fees is now at its lowest level since 1999 - for the industry it demonstrates the pressure to grow income outside of traditional banking.

At a time when new regulation and competitive pressures would suggest non-interest income – often in the form of capital efficient services rather than capital intensive lending – would be growing more strongly, the evidence is to the contrary.

The RBA survey specifically excludes non-interest income derived from funds management and insurance operations but this is clearly one avenue most banks are travelling down, building up their wealth management businesses as the Australian population ages and ordinary savings shift out of deposits to other vehicles.

In the household sector, the RBA found fee income grew by 2.3 per cent in 2013 following declines in each of the previous three years.

“This primarily reflected growth in fee income from credit cards and personal loans,” the bank said. “However, there were also increases in income from other fees, including deposit fee income, which had fallen noticeably in recent years.”

Interestingly one area of growth was in foreign currency conversion fees on credit cards which would presumably be from the strong overseas travel market in recent years together with the increase in online shopping from foreign merchants.

On the much more significant home loan front, account-servicing fee income increased but was offset by a fall in other fee income (including exception fees, fees for breaking fixed-rate loans and service fees from securitised loans).

“Much of the growth in account servicing fee income in the year can be explained by growth in housing loan approvals,” the RBA said.

But the bank added “growth in housing loan approvals is usually associated with higher establishment fee income” however “a number of banks have been waiving these fees for some customers”.

Likewise, a 2.8 per cent rise in total fee income from business also showed evidence of tight competition. For example, while payment card merchant service fees rose the increase in these fees paid by small businesses was mostly offset by broad-based declines in other types of fee income derived from small businesses.

“Loan fee income from large businesses also contributed to the rise in banks’ fee income from businesses, which mostly resulted from an increase in the value of account-servicing fees and was broadly in line with growth in the value of new loans,” the RBA said.

“Exception fee income from businesses continued to decline in 2013, as did fee income from bank bills (which includes charges for arranging bank bill facilities and accepting or endorsing bills). Despite growth in the value of business deposits, deposit fee income from businesses declined slightly in the year due to falls in income from account-servicing and transaction fees.”

One of the interesting things about the fee survey by the central bank – and the now well regimented ABA analysis of it – is such scrutiny is unique in developed markets. As the ABA points out, no similar market, not the UK, Canada, New Zealand, the US, produces anything comparable.

The RBA has been producing this work since 1997, not coincidentally a period which corresponded with a particularly big surge in bank bashing.

Over the years I’ve attempted to test whether Australia is an expensive banking market but with this lack of comparable data a clear answer isn’t available. What is evident is that the Australia industry has a bigger representation of more expensive but more sophisticated products, particularly on the wealth side.

KPMG’s banking sector leader Andrew Dickinson notes that in some countries where extra-market forces, such as government ownership of banks, have come into play, banking can be cheaper.

“But there are now many who argue the UK’s fee free banking is not sustainable, that it’s restricting new innovation, but no one wants to be first to go back to charging for transactions,” he says.

In other markets, more explicit pricing is emerging. Dickinson points to Singapore, for example, where retail products such as home loans and deposits are being priced explicitly against a benchmark interest rate, much as business loans in Australia are priced against the BBSW (bank bill swap rate).

But whether that would deliver consumers even cheaper fees is a moot point. Competition seems to be doing a decent job in Australia. Maybe it’s something the Murray Inquiry will mention.