Non-interest income and expenses have an important impact on bank earnings and risk management. Net interest income (interest income less interest expense) is still the primary driver of bank earnings but spreads and margins are shrinking all the time. Thus, finding new or increasing old fees and service charges is important. Controlling non-interest expenses has always been important but with inflation, more complexity, and faster change, non-interest expenses are of constant concern.
Stock analysts (and others) stress attention to the non-interest side of the earnings equation. Non-interest income has become a separately identified component of bank revenue and peer comparisons are a constant part of analytical evaluations. The operating efficiency ratio has become an issue with a level of emphasis that has caused many bank executives to loose sleep at night or worse.
Fees and Service Charges
Historically, bankers have "given away" many extra services in exchange for main-line banking activities of loans and deposits. Customers have been lured to the bank with "free" checking accounts and other enticements. Today, bankers aggressively look for new ways to levy extra charges for lending and deposit services without offending the customers too much.
New fees on old services are becoming more commonplace. For example, "free" checking accounts are advertised extensively, but when you read the fine print, many customers find that there is no truly "free lunch". Loan fees have become so extensive and complex that Congressional investigations have been undertaken at the urging of various consumer action groups.
The introduction of new products has provided added boost to non-interest income. Credit cards, electronic transfers, ATMs, telephone bill paying, and Internet services are all examples. Some have professed that new sources of fees and service charges will be essential to the long-term survival of the banking industry.
Operating expenses and corporate overhead costs
The productivity gains from today's computer and communication technology is awesome, but expensive. Automation was introduced to bankers in the 1950's, tolerated during the 1960s, but not embraced until the 1970s (or even later by some. No one argues about technological change today, just its timing and cost.)
The labor cost of professionals, technicians and executives is major. Keeping pace with the specialists of the day requires time and significant cost. Rapidly growing financial institutions; constantly increasing marketing expenses and other costs of competing; and changing consumer needs and desires have pushed operating expenses higher and higher.
Improved financial performance will depend upon the banker's ability to contain staffing levels, salaries and benefits, technology costs and discretionary expenses. The challenge is keeping a balance between expense levels and growth.