Bank earnings soar 16% to $71.7 billion in 1999

WASHINGTON - As the American Bankers Association was busy filing its latest motion in its lawsuit against NCUA that is aimed at protecting banks' marketshare, just-released statistics show the banking industry's earnings hit new stratosphere-like heights in 1999. The banking industry posted a record $71.7 billion in earnings last year-the eighth consecutive year the industry has posted record earnings. The $71.7 billion in earnings was an impressive 16% higher than last year's record earnings. With earnings of $17.8 billion, the fourth quarter of `99 was the industry's third best quarter, in terms of earnings, ever. Fourth quarter net income of $19.4 billion was a 20% increase over the fourth quarter of 1998. The banking industry's net income of $10.9 billion was 7.3% higher than in 1998. "Leave it to the bankers to cry foul about credit union `competition' when they've racked up their eight straight year of record profits. Banks should spend more time serving customers and less time filing lawsuits," said CUNA President Dan Mica. "Judging from the banks' profit statements, banks are certainly not hurting. We hope the judge will ultimately agree that Americans are better off having a not-for-profit alternative," said Mica. Reasons behind the banking industry's strong growth obviously start with a booming economy, and also include fewer merger related expenses. But looking further shows that banks are making more money on noninterest income. Noninterest income increased by approximately 17% in 1999. Noninterest income is generated by fees, trading revenue and other areas. Large banks (over $100 million in assets) generated 43% of their operating revenue from noninterest income in 1999. Five years ago they only generated about 34% from noninterest income. Noninterest income for smaller banks ($100 million or less in assets) is much less than their larger counterparts. Small banks only get roughly 25% of their operating revenue from noninterest income. "They're making a lot of money right now. I would argue one reason is that the economy is doing incredibly well. Making loans is a good business right now. I don't think you can say they're gouging the consumer. They're probably being a little more efficient," said Dr. Tun Wai, chief economist of NAFCU. One telling stat from the year-end data comes from Return-on-Assets. ROA for banks reached a record 1.31%, .08% higher than the 1.23% record set in 1997. However, small banks didn't fare as well. For banks with less than $100 million in assets ROA fell 17 basis points since 1997 to 1.01%. In 1997, ROA was 1.18% for this group and 1.13% in 1998. "This is part of the reality of the marketplace. One of the things the trade associations and others will be looking at is the viability of smaller institutions. It is getting tough with one-stop shopping. What the smaller banks are doing is more specialized," said Wai. Credit union proponents are always quick to point out banks' growing fee income, but they may want to look in the mirror before doing so. While fee income does make up a large portion of banks' noninterest income, credit unions generate a larger percentage of their noninterest income from fees (see chart below). For example, 1999 preliminary data from Moeb$ Services, Lake Bluff, Ill., shows that banks generated 35% of their noninterest income from deposit fees, while credit unions generated 56%. How can that be if bank fees are consistently shown to be higher than credit union fees? According to Mike Moebs, chairman of Moeb$ Services, volume and relationship pricing are the reasons. Moebs said the average commercial bank has 4,000 consumer accounts, while the average credit union has 9,000 consumer accounts, giving credit unions more accounts to generate deposit account fee income. Moebs also pointed out that relationship pricing is utilized much more in the banking industry than in the credit union industry. A banking customer who has a loan or two with a bank and a good checking account history will be more likely to have an NSF (Not Sufficient Funds) fee waived by the bank because of that relationship. Moebs said credit unions are less likely to waive that fee. He gave the example of the banking industry's median NSF fee of $18, which is higher than the credit union industry's average NSF fee of $15. But Moebs said because of relationship pricing banks will only charge that fee 80% of the time, compared to credit unions, which are more focused on treating all members equal, and will charge the fee 95% of the time. If you then look at the average of banks charging $18 some 80% of the time and credit unions charging $15 some 95% of the time, you get a statistical dead heat, with the bank NSF averaging out to $14.40 and the credit union fee to $14.25. Moebs said credit unions definitely have more consumer accounts to fee. He said 35% of the accounts at commercial banks are wholesale, and 65% consumer. But at most credit unions 100% of accounts are consumer accounts. "NCUA officials and trade associations don't like to hear it but the credit union movement makes its money on fees. If the credit union movement didn't have fees it wouldn't have any net income in 1998 and 1999. But make no mistake the banks aren't far behind," said Moebs. Moebs said in his 20-years plus examining fees at banks and credit unions there's only been two times when banks' noninterest income made up a larger percentage of noninterest income than credit unions. -pgentile@cutimes.com