Banks are relying more on unit trust fee income

PERUSE through any income statement of the major banks in the country and you will notice that non-interest income has become a major money earner for the country's financiers.

Some of the main areas of non-interest income that banks are focusing on are foreign exchange, wealth management, bancassurance, trade finance, and structured products. And unit trust is another lucrative segment of fee income more have come to rely on over the years.

According to some banking analysts, the non-interest income for local anchor banks is expected to reach RM13bil-RM14bil this year and hit about RM15bil next year.
Wong says the front-end service charge is the primary means of compensating the agents.

“There is an increased focus on non-interest revenue and a continued focus on growing that. As interest margins decline, banks are looking to grow their non-interest revenue that is off the back of increased competition for non-interest revenue in the commission and fair value lines,” an analyst says.

“As net interest margins are being squeezed, we expect banks to focus more 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,” another analyst says.

One of the biggest beneficiary of non-interest income from the unit trust business is Public Bank Bhd.

Public Bank says its non-interest income recorded a commendable growth of 9.1% compared with the corresponding period in 2010, mainly driven by higher banking transactional income and income from Public Mutual's unit trust business as well as higher investment income.

“The group's unit trust management business through its wholly-owned subsidiary, Public Mutual, continued to show commendable performance with a pre-tax profit growth of 22.3% in the nine months of 2011, and maintained its pole position with RM41.3bil of net assets under management. It accounts for an overall market share of 43% as at the end of August 2011, and with market shares in the equity and Islamic unit trust fund sectors of 60% and 55% respectively,” chairman Tan Sri Teh Hong Piow says in a statement when the bank's results were announced.

United Overseas Bank (M) Bhd (UOB) managing director and country head, personal financial services division Kevin Lam acknowledges that unit trust plays an important role in the bank's fee-based income revenue. He finds that there is strong potential for unit trust as many consumers may not fully appreciate the potential of unit trust as an investment tool.

Malayan Banking Bhd deputy president and head of community financial services Lim Hong Tat says unit trust enables the bank to diversify its range of products to clients and meet their differing investment needs. “For the bank, it also provides us the opportunity to expand our range of income.”

“The current unit trust contribution to the bank's retail fee revenue is about 7% to 8% and we are looking to increase by 12% year-on-year,” he says.

Lim says that in March 2007, Maybank adopted an open architecture distribution platform which enables the bank to distribute third party funds. Currently, Maybank is a distributor of over 110 external funds from 13 approved fund houses.

“Through this approach, Maybank is offering a wider range of fund selection to our customer base that suits different risk appetites and investment objectives. This offers an advantage to customers who invest through Maybank as they have the benefit of leveraging on different fund managers' investment expertise rather than focusing on a single investment philosophy,” Lim says.

OCBC Bank (M) Bhd head of wealth management Ong Shi Jie says unit trust fee income constitutes a healthy proportion of total fee income earned by OCBC and represents about a third of the bank's wealth management fee income.

“While we remain confident about this investment tool, we think its growth might be somewhat conservative due to the current uncertain global market outlook,” she says.

She adds that revenue aside, unit trust remains important as a financial solution as it continues its strides in the wealth management business.

“With OCBC Bank's strong mass affluent franchise and deposit base, it is natural for us to offer customers alternatives for growing their wealth besides interest earned from deposits. While there are many investment alternatives such as stocks and treasury products, what makes unit trust distinctive is its affordability, the diversification factor and the ready access it gives customers to professional expertise,” Ong says.

While banks are focusing on growing its non-interest revenues, they are also facing tremendous competition from other institutional unit trust agents (IUTAs) and agencies in the portfolio of unit trust investments. Banks, however, are optimistic of competition and believe there is room for everyone.

“Of course, as a bank we are competing with other IUTAs, agencies, private wealth advisor. However, the competition is healthy and we welcome it,” UOB's Lam says.
Ong says unit trust fee income constitutes a healthy proportion of total fee income earned by OCBC.

“We believe there is enough room for both agents and IUTAs in this business. Although both cater to retail participants, not all funds are similarly distributed by both parties. Agents may sell funds that are not sold by IUTAs,” he explains.

In the case of wholesale funds, only selected participants are able to invest and it is usually distributed through IUTAs who offer advisory services, Lam says.

Meanwhile, HwangDBS Investment Management Bhd chief product officer Steve Lim concurs that in any open market there would be competition. He says competition would stimulate growth and improvement.

“Thus, as a fund house, before we launch any product, sufficient market research needs to be done. Feedback gathered from our partners or distributors, regulators and, most importantly, clients are critical. We first look at who are our target market and the ready audience. A product cannot suit everyone. In conclusion, our products have to offer a proposition that is highly competitive with other investment products,” he adds.

OCBC's Ong believes the market space is big enough for multiple distribution channels to co-exist: banks, agents and independent financial advisors. “What's important is that the public begins to see more clearly the value of unit trusts and getting meaningfully engaged in this kind of investment.”

MAAKL Mutual Bhd CEO Wong Boon Choy says that 10 years ago when the banks were allowed to sell unit trusts, tied agency players viewed it as a “threat” to their sole distribution channel.

That threat has somewhat petered out as tied agents have dominated distribution again. At the end of 2000, there are less than 15,000 tied agents. Since then the number has grown by leaps and bounds and by the end 2010, there were more than 60,000 tied agents.

“Agents' commission was already compressed when the EPF capped the maximum service charge to 3% for approved funds under the EPF members investment scheme effective from Jan 1, 2008. This translates to more than 50% reduction in the normal service charge. The front-end service charge is the primary means of compensating the agents for the service they provide to investors,” Wong says.

Maybank's Lim says not all banks adopt the agency model to promote unit trust funds. The agency business, he says, is often tied to just selling the bank's in-house funds, and hence he feels they are more restricted in fund choices and selections.

Lim says an adoption to an open architecture framework where a wide range of funds is offered to customers allows the bank to construct an investment portfolio according to a clients' investment needs.

“Nevertheless, we are supportive of healthy competition between banks and agents as it encourages both parties to provide excellent levels of service to customers,” he says.

Separately, it is argued that banks only distribute unit trust funds that are performing and do not offer funds across the board. Banks, however, refute the statement.

“We disagree with this view. There are funds that perform due to market conditions, to mandates set for a particular purpose and there are those which are unable to perform due to these same reasons,” UOB's Lam says.

He explains that a performing fund is one that meets the investment objective set in its mandate and is managed well by its fund managers. Risks and returns of the funds are closely related while lower risk would garner lower returns and vice versa,

“As an IUTA, we offer a suite of funds that cover our customers' investment needs and objectives,” Lam adds.

Ong says OCBC is increasingly looking for fund managers to actively manage the risk or return parameters of their funds to generate a consistent level of outperformance over a longer time horizon.

“Fund managers that have trusted and proven performance record will be expected to have a stronger following. However, as an institution, while performance is important, this is not our only consideration. As part of our due diligence and continued evaluation of our product offerings we also consider how well the unit trust companies support the distribution relationship as well as customer relationship,” she says.

Ong points out that in low market conditions, no fund is likely to be spared but it is during these trying times that it sees the difference between fund managers who are committed to this business for the long haul and those who are not.

“The former labours long and hard to offer numerous updates to distributors on what is happening and works with distributors to hand-hold customers. This makes a difference to us as a distributor as we owe this level of care to our clients. When a fund house, in times of underperformance, stays mum and steps back, this is certainly a deterrent.”

Maybank's Lim says the bank conducts extensive reviews and undertakes necessary due diligence on all the funds and fund managers. “Our emphasis is on the capability and ability of the fund manager to generate consistent performance and returns over a period of time so that our customers' have the full benefit of their investments.”