To fee or not to fee
Noninterest income is becoming an important part of Lebanese banks’ diets
The question of whether banks should structure their incomes on the premise of interest alone has long been answered in the negative. Diversification of risks and revenue streams have led institutions far beyond being mere lenders to generating income from services, transaction fees, trading, money management fees, commissions and the like. Even before the Great Recession, noninterest income had been researched in literature with a focus on its linkages to profitability and risks. Executive looks at several aspects of noninterest income in Lebanese alpha and beta banks over the past few years.
From 2002 to 2014, the number of ATMs in Lebanon nearly trebled from 582 to 1,569 at yearend. These figures are not just impressive; they illustrate a major trend in banking — the pursuit of noninterest income as a way to diversify banks’ revenues. While most banking income still comes from old fashioned lending activities, income from nonlending sources has come to play a superior role over the last decade.
In total, Lebanese financial sector income attained double digit growth from 2002 to 2012, except during 2004, 2006 and 2007. Moreover, it surpassed the growth of net interest income for the same period, except from 2006 to 2008, where the latter reached its peak during 2006. Furthermore, the growth interest income (interest paid on loans) demonstrated lower levels compared to commission fees per four years.
Alpha banks have a competitive advantage over beta banks as the former held around 87 percent as a stake of assets out of the total Lebanese financial sector in 2012. Moreover, alpha banks offer investment banking services, besides their ability to select high quality clients and operate branches abroad. Research indicates that banks, whether alpha or beta, should seek to increase noninterest income in order to reduce risk — that is, diversify. Matthias Köhler, a researcher at the German central bank, examined the impact of noninterest income on the German financial sector and found that small banks should lean more on noninterest income, whereas larger banks with investment tools are already more diversified. He added that there is almost no correlation between noninterest and net interest income variables. Therefore, banks could be diversifying to become more stable by adding revenue streams from noninterest income.
Noninterest revenues have a unique habit of stabilizing the source of income, as opposed to interest income on loans, which is much more variable and reliant on market conditions. For instance, noninterest income will be much less affected by a shrinkage in GDP or interest rates. According to research from the Australian School of Business at the University of New South Wales, banks should seek diversification in noninterest income activities in order to make the banking system more robust in ‘high concentration’ countries (i.e. where banks have a competitive environment). They added that noninterest income can act as ‘ring fencing’ and can significantly reduce systematic risk. In 2012, the return on assets (ROA) for the Lebanese banking sector stabilized, but it lagged behind its record from 2010. While, it almost doubled from 2002 when it was 0.53 percent, reaching 1.01 percent during 2012, from 2010 to 2012, both alpha and beta banks showed a slightly decreasing trend in ROA. Both have sustained a yearly growth in total assets (mainly loans) but for alpha banks net profits plummeted during 2011, whereas for beta banks it showed shrinkage during 2011 and 2012.