Banks’ will focus on non-interest income amid growing competition

PETALING JAYA: Analysts expect banks' non-interest income to jump significantly to between RM15bil and RM20bil next year amid compression in net interest margins (NIM) in the banking industry.

NIM is a measure of the difference between the interest income generated by banks and the amount of interest paid out to depositors.

Many analysts anticipate NIMs to remain compressed due to intense competition among banks for mortgage loans and deposits despite being in an interest rate upcycle environment.

An analyst with a foreign bank-backed brokerage said she expected non-interest income business for the country's eight anchor banks, excluding Islamic banks, this year to be about RM17.5bil compared with RM3.1bil in the first quarter. For next year, she anticipated the figure to rise to RM20bil.

She attributed this to greater focus on foreign exchange, wealth management, bancassurance and capital market activities which would enlarge fee-based income and enhance the non-interest income of banks. Generally, banks derive income from interest and non-interest income.

A banking analyst with MIDF Research said he expected non-interest income for the industry to reach RM13.7bil this year and hit RM14.6b next year, adding that this figure was applicable to the local anchor banks, excluding foreign banks.

Analysts said the main driving factors for the surge in non-interest income would be the Economic Transformation Programme and the divestment of government-linked counters and capital market activities.

“As NIM is being squeezed, we do expect banks to put more concentration on non-interest income to grow profit and diversify their revenue stream. However, all fees imposed by banks are not created equal some fees are stable and predictable over time while others are highly volatile because they are cyclical.

“To enhance their non-interest income, banks will focus on creative product development and aggressive cross selling and concentrate on certain segments such as small and medium enterprises.

“Some of the banks that have strong non-interest income business are Maybank, CIMB, RHB and AmBank,'' the MIDF analyst said.

Malaysian Rating Corp Bhd vice-president and head of financial institution ratings Anandakumar Jegarasasingam felt that in view of interest margin pressure, it was only natural for banks to grow their non-interest income to enhance profitability.

Broadly speaking, he said the non-interest income sources of the banks include transaction-related fees and charges which tend to vary with the level of transactions as well as treasury-related activities.

In the current competitive environment, he said, banks had limited flexibility to adjust their fees on banking transactions and activities, with the exception of some of the larger banks.

Therefore, he said, a likely area of focus for the banks would be treasury-related activities, adding that they might also focus on introducing new business lines such as cash management services for corporate clients and wealth management services for high net-worth individuals.

However, RAM Ratings head of financial institution ratings Promod Dass felt that for most banks, lending activities was their mainstay and thus would not be surprised to see non-interest income making up only 30% to 35% of the banking system's gross income.

While one could expect to see banks strive hard to build up the composition of non-interest income as a proportion of gross income to cope with the narrowing NIMs, the current proportion of non-interest income would unlikely change because it was hard to change a bank's business model over the short term, he said.

Dass said larger local banks and some foreign banks typically earned more fee income by virtue of higher volumes of payment and foreign exchange transactions, capital markets-related income as well as cross selling of various products and services.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said for its financial year ended Dec 31, 2010, the bank's non-interest income contributed close to 30% of total income. For this year, he said the bank's intention was to protect and enhance the contribution from non-interest income.

Choo said factors that could have some bearing on the growth of the bank's non-interest income included continued favourable domestic and external economic conditions which were a necessary environment for the promotion of trade finance activities, foreign exchange transactions, securities dealing, and the demand for unit trusts and other structured products.