Bank profitability should benefit from an increase in non-interest income, the European Central Bank has said in a report on the structure of bank incomes.
The report confirms the increased importance for EU banks of non-interest income, such as fees, commissions and profits from financial operations and securities holdings. But these activities are also increasing operational, reputational and strategic risk for banks, according to the report.
The European Central Bank is moving towards an increased role financial supervision, as confirmed recently by the Governor of the Central Bank, Maurice O’Connell. The report on bank income was presented in early April by Tommaso Padoa-Schioppa, the ECB Executive Board member who looks after financial supervision.
The ECB concluded that fees and commissions are the main component of non-interest income, with country-specific figures ranging from 35% to 72%. The Irish figure was second highest at 68%. Fees from securities business as a proportion of non-interest income for Irish banks was 11%, ranked ninth among EU banks.
The relative importance of fees and commissions decreased from 1994 to 1998. The other three main components were net profit from financial operations, income from securities (reaching nearly 17% and showing an increasing trend) and other operating income.
Non-interest income has increased in importance relative to net interest income. The ECB report said there had been ‘a noteworthy increase from 32% in 1995 to 41% in 1998’. ‘This evolution was a result of both increasing non-interest income and the ongoing reduction in interest income.
The ECB said the growth in non-interest income had helped bank profitability. ‘The positive impact on profitability has, however, been limited by the increased operating costs associated with the development of activities generating non-interest income. Improved profitability has also been achieved by better cost control and more efficient use of capital.’
The ECB said that non-interest income ‘does not seem to be more volatile than net interest income’.
It said that on the one hand, ‘profits from financial operations and, to a lesser extent, income from securities have demonstrated high volatility, but, on the other, fees and commissions have typically been quite stable.’ These other activities brought new risks to banks. |
