Bank fee increases not all bad news
The knockers were out in force this week in uproar at the release of latest Reserve Bank of Australia figures showing that bank fees from households and business rose more than $1.4 billion between 1997 and 1999. When put in perspective, the 35% increase to $5.4 billion shows – at the risk of repeating ourselves – that like beauty, statistics are sometimes in the eye of the beholder.
Today’s Melbourne Age makes some valid points on the factors that have had some bearing on this figure:
* The increase in fee income does not necessarily mean that fees have increased, but rather it reflects increased activity within the banking system.
* The intense competitive pressure within segments such as home lending has forced banks to be less dependent upon interest margins. Fees will compensate the banks in this area.
* Interest margins – that is the spread between the averages interest earned on loans and average interest paid on deposits – fell in this period by 70 basis points. Since 1994 the spread has actually narrowed by 135 basis points. In short, banks have lost interest income of $3.6 billion a year.
Therefore, during the report period fee income rose $1.4 billion whilst interest income was $3.2 billion less – in other words bank customers were actually $1.8 billion a year better off!
Whilst banks are actively shepherding their customer base towards lower cost distribution channels, which are in turn attracting new forms of fee structures they cannot rely on increases in fee income to replace income lost on interest margins. There is greater emphasis placed on credit quality in their lending portfolios and profit streams in non-traditional areas such as funds management and insurance.
By understanding the impact of these factors on bank revenue streams, one can begin to see why banks are placing so much emphasis on working at better efficiencies in their work practices and looking at cost-cutting within its traditional forms of service delivery.
In light of these factors it is no wonder the Commonwealth Bank is anxiously awaiting the green light from Prof. Alan Fels of the ACCC to begin formally merging with Colonial State Bank.