Wednesday, April 18, 2012

So which bank goes through the harder way to earn your money?

A strong banking system is set up to act as a good lubricant to the economy. What are their main functions? By either providing services and loans for you to buy your properties, motor vehicles, business loans etc. On the other hand, if you have excess funds, their will provide avenue for you to put your deposits with them and using those funds, the banks will be the intermediary to re-lend to those who needs them. These are the basic functions of a bank, but of course from those, later on merchant banks, treasuries, remittance services etc are created. If left to these few core things done well, the growth of an economy will be much smoother to manage be it for running of a business or for ownership of a better home or motor vehicles.

However along the way, banks (as always) became very greedy and they think that they can make more money from you through other means - where it is less risky. How? They start to charge you fees for all kinds of things. They charge unnecessary high fees for late repayment. They charge high fees for overseas remittance. They also charge exorbitant fees for some basic banking functions like remittance, confirmation, trade finance etc. All those fees are categorised under the category of non-interest income in the bank's income statement.

As you can see, banks main income comes from interest income and non-interest income (fee income), and you can add on another category to Islamic Banking Income for Malaysian banks. Interest income has largely elements of risks although it can be fully secured as in the lending for your homes, while non-interest income are most of the cases non or less-risky for example they are charging you for doing a Telegraphic Transfer, Treasuries, audit confirmation, changing of signatories etc. And of course Investment Banking fees are categorised under non-interest income.

Over here, we want to see which bank is the one which concentrates on providing more basic functions of a bank (i.e. lending etc) and doing less thinking of how to charge you fees only. Let's look at a comparison of three banks in Malaysia: Public Bank, Maybank and Hong Leong Bank. (I did not include CIMB as over the last 10 years they have acquired Southern and BCB, hence it may not be that accurate)

Comparison of three banks: Public, Maybank and Hong Leong
I took a 10 year view to look at the behavior of these banks to be able to know what kind of actions and perspectives they have taken on. If you look at the comparison, Public Bank is the one which concentrates on more loans and lesser fee income. The ratio of net interest income to fee income was in fact increased from 3.49x in 2001 to 4.45x in 2011. Over the period of 2001 - 2011, net interest income increased 163% which means that they have increased their loans and advances substantially.

If you look at Maybank, the Net Interest Income growth over the 10 years was 79% while non-interest income in fact grew more, by 215%. As a result of that ratio of net interest income to fee income dropped from 3.07x to 1.75x.

Hong Leong Bank was even worse. Their net interest income only grew by 35%, while fee income grew by a much whopping 210%. Hence, I am wondering whether they are more interested to make fee income or loans?

Err...from here, can you guess which bank would assumingly be taking more risk to make your hard-earned money?

Although this is a much simplistic way to explain how a bank functions as it can be much more complex, the writer feels that it is high time that Bank Negara looks at regulating banks charges  especially in this age of exorbitant fee income.

No comments: