Noninterest income shoulders more of the weight.

In times like these, full of inverted yield curves, contracting margins, and asset quality concerns, noninterest income can make the difference between hitting and missing earnings targets. Every CFO knows this, and each one works diligently to maximize revenue in these lines, at the same time balancing

Not surprisingly, over the last two years the fraction of revenue generated by noninterest related channels has steadily increased in banking. The chart shows that on a median basis the ratio of noninterest income to net interest income has increased from 18% in the first quarter of 2006 to 23% in the fourth-quarter of 2007 for publicly traded banks and thrifts. The most notable increase came between the third and fourth quarters of 2007 where the ratio increased by a little more than three percentage points.

Explaining some of the change, the chart shows that over the same period the noninterest income median growth rate was greater than the net interest income median growth rate. The second quarters of the year tended to have the largest spread at about 15 percentage points in each of the prior two years.

Speculating on the performance into late 2008 and 2009, it is hard to imagine that net interest income and margins can compress much more. It is likely that noninterest income targets will stay at least at the current run rates, and will probably move upward. Competitive pressure may be a fringe issue that tries to drive them down, but it is unlikely, given the current operating environment, that many banks will be able to suffer a significant cut in these lines in order to bring in more traffic.

--John McCune, SNL Financial

jmccune@snl.com

Noninterest income trends
Public banks and thrifts

Noninterest income/net interest income (%)

         2007Q4   2007Q3   2007Q2   2007Q1   2006Q4   2006Q3   2006Q2

Median    23.03    19.64    19.90    19.27    19.49    19.20    19.04

         2006Q1

Median    18.15

Net interest income growth (annualized linked-quarter) (%)

         2007Q4   2007Q3   2007Q2   2007Q1   2006Q4   2006Q3   2006Q2

Median     2.15      6.4    11.06    -3.09     0.28     3.30    10.71

         2006Q1

Median     1.21

Noninterest income growth (annualized linked-quarter) (%)

         2007Q4   2007Q3   2007Q2   2007Q1   2006Q4   2006Q3   2006Q2

Median     7.72     0.90   25.77      0.00     2.56     7.43     26.08

         2006Q1

Median    -5.62

Source: SNL Financial