Fee income boosts bank profits as treasury, margins feel the pinch

MUMBAI: Fee income has become a major profit-generating avenue for domestic banks, as pressure has increased on their net interest margins (NIM) and treasury income.

Fee income for both State Bank of India and HDFC Bank rose more than 25% in the past quarter. The top state-run and private sector banks had posted a 16% and nearly 19% increase, respectively, in fee income in the three months ended December 31, the last quarter before the Reserve Bank of India ( RBI) started its rate-cutting cycle.

Banks have a natural tendency to focus more on fee income as their balance sheets and loans grow, analysts said.

Loan products and credit cards are the major sources generating fee income, as banks often levy processing and documentation fees, prepayment or foreclosure charges, etc.

Fee income as a profit-generating avenue came into focus as the RBI cut interest rates by a percentage point this year to 5.50%, which added pressure on NIMs as well as weighed on the treasury income of banks.


"Banks have their business designed in a way that generates more 'other income' by cross-selling products. Banks that have higher cost of deposits would focus more on forex transactions and non-fund-based income. But increasing fee income is part of ongoing efforts for all banks," said Sanjay Agarwal, senior director at CareEdge Ratings.

"In my opinion, the SMEs part would be doing good in the overall corporate segment, because credit growth to SMEs is pretty large and currently that is the most profitable segment in the banking system," Agarwal said.

SBI posted credit growth of 12.73% on-year in the quarter ended September 30, with retail personal loan expanding 14.09% and loans to small and medium-sized enterprise (SME) rising 18.78%. For HDFC Bank, total loans increased 9.9%, with retail loans growing 7.4% and loans to SMEs expanding 17%.

"Fees are majorly earned from the loan products, hence as advances of a bank grow, so does the fee income. Fee income is generally higher for banks that have a good retail base," said Asutosh Mishra, lead BFSI analyst at Ashika Stock Broking. "NIMs have been under pressure this quarter and the previous quarter also; so in a time like this, fee income provides good support for operating profit for banks."