What it means
A traditional bank makes most of its money from the gap between the interest it charges borrowers and the interest it pays savers. Everything else it earns is non-interest income.
That includes account fees, card fees, payment fees, advisory fees, wealth management charges, insurance commissions and gains on selling or trading investments. This income matters because it behaves differently from lending income.
Interest income rises and falls with interest rates and loan demand, whereas fee income often depends on activity levels, such as the number of transactions or the value of assets under management. A bank with a healthy mix has more stable overall earnings.
Analysts watch the share of non-interest income in total revenue as a measure of diversification. A higher share can suggest less sensitivity to interest rate changes, although some fee streams, such as trading and investment banking, can be volatile.
The quality of the income matters as much as the size. Non-interest income also has costs attached.
Fee-generating businesses require staff, technology and compliance, so they often have a higher cost-to-income ratio than pure lending. Managers should look at the profit from each stream and not only the revenue.
Outside banking, companies that offer financing to customers, for example a retailer with a store credit card, may also report fees and commissions from the finance arm separately from interest. The principle is the same: it identifies earnings that do not depend on the interest margin.
When reading a set of results, it helps to ask three questions of this line. How much of it recurs every year, how much depends on market conditions, and how much comes from one-off sales of assets or businesses.
A bank with a high recurring share is usually easier to forecast and to value.
In practice
Real-world examples.
Example
A regional bank launches a small business payments service and charges merchants a fee on each card transaction. After a year, the fees add $3,000,000 to earnings that do not depend on lending. The chief executive highlights this in the annual results.
Example
A wealth management arm of a large lender charges clients 0.75% of their invested assets each year. For a client with $2,000,000 invested, that is $15,000 of non-interest income. The bank grows the line by recruiting more advisers.
Example
A trade finance team earns fees for issuing guarantees and letters of credit on behalf of exporters. The fees are not interest, so they are recorded as non-interest income. The team's profit is tracked separately from the lending book.
Formula
Calculation
Non-interest income share = non-interest income / (net interest income + non-interest income) x 100
Suppose a bank reports net interest income of $60,000,000 and non-interest income of $40,000,000, made up of $15,000,000 of card and account fees, $12,000,000 of wealth management fees, $8,000,000 of advisory fees and $5,000,000 of trading gains. Total revenue = 60,000,000 + 40,000,000 = $100,000,000. Non-interest income share = 40,000,000 / 100,000,000 x 100 = 40%. If net interest income falls by 10% to $54,000,000, the share rises to 40,000,000 / 94,000,000 = about 42.6% and total revenue is $94,000,000.Case study
Seen in the real world.
Harbourline Bank is a fictional lender created for this illustration. When central bank rates fell, its net interest margin shrank and its profit dropped by 18%, even though its loan book grew.
Management responded by expanding its payments, foreign exchange and advisory services. Over three years, non-interest income grew from 22% to 34% of total revenue, and earnings became less sensitive to rate changes.
Within two years the board began to review each fee line alongside the loan book, asking for the profit and the risk of every product before approving more investment. The illustrative lesson is that fee income is not free money. The bank had to invest $5,000,000 in technology and hire specialists, and it monitors the profit from each fee line to be sure the growth is worth the cost.
Watch out
Common mistakes.
- Treating all non-interest income as stable, when trading gains and deal fees can swing sharply from year to year.
- Ignoring the costs of earning it, which can make a fee business less profitable than it looks.
- Comparing banks without adjusting for one-off items, such as gains on selling a business, which flatter the figure for a single year.
Questions
People also ask.
What counts as non-interest income?
Fees, commissions, service charges, trading and investment gains, insurance income and other earnings that are not interest on loans or securities.
Why do investors like a higher share?
Because it reduces dependence on interest margins, but the benefit depends on how steady and profitable the fees are.
Is it the same as other income?
Not exactly, as the term is used in banking for a major revenue category, while other income elsewhere may mean minor or unusual items.
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