Banks' fee income growth shows signs of recovery

It may, however, not be enough to offset treasury losses

The recovery in fee income growth has provided some relief to bankers but it might not be enough to offset the impact on lenders’ treasury income in the coming quarters.

For most of the last financial year, banks’ fee income growth was muted. Banks earned lower corporate banking fees due to slowdown in project finance in an uncertain macro economic environment. State Bank of India (SBI), the country's largest lender, reported a five per cent decline in fee income in 2012-13. However, the rising spends on credit cards, increase in sale of third-party products and demand for consumer loans have led to strong growth in retail banking fees in the first three months of this financial year. This has made bankers optimistic on their overall fee income growth in 2013-14.

“We have seen an improvement in fee income growth from about three per cent for the full year 2012-13 to 8.9 per cent on a year-on-year basis in the first quarter. The improvement in fee income growth was primarily driven by growth in retail banking fees,” a senior executive of ICICI Bank told analysts following the bank’s first quarter earnings on July 31. ICICI Bank’s corporate banking fees remained flat on a year-on-year basis. The country’s largest private sector lender now aims for a double-digit growth in its fee income in the current financial year.

Mid-sized private lenders such as IndusInd Bank and YES Bank also reported strong growth in their fee income during April-June period. While IndusInd Bank’s core fee income was up 31 per cent, YES Bank saw 53.4 per cent rise in its fee income.

State-run banks also improved growth in their fee income. For Bank of Baroda, fee income growth accelerated to 14.1 per cent during the first three months of this financial year from 2.8 per cent in 2012-13. The revival in fee income growth assumes significance as the banks’ treasury earnings are expected to dwindle in the coming quarters due to hardening of bond yields. Both fee income and treasury earnings form part of banks’ non-interest income.The Reserve Bank of India’s (RBI) recent measures to tighten liquidity and curb volatility in foreign exchange rates have led to a rise in bond yields. On Monday, the yield on India’s 10-year benchmark government bond climbed to 9.17 per cent, its highest level since the collapse of Lehman Brothers in late 2008.

Typically, when yields rise, bond prices fall and banks incur mark-to-market losses  (writting down asset values on current prices) in their investment portfolios. Bankers and industry analysts believe the revival in fee income growth would not be sufficient to counterbalance the impact on banks’ treasury earnings. “The hit on treasury income will be much higher and we don’t expect fee income growth to act as a cushion. Also, in the current environment, doubt remains if fee income growth can be sustained over the next few quarters,” said an analyst with a local brokerage requesting anonymity.

Bankers estimate that lenders will take a mark-to-market hit of Rs 40,000 crore in the July-September quarter.