In a year in which interest rates dropped nearly to zero and demand for business loans took a dive, fee income has been a delightfully bright spot for banks.
Across the industry, a significant spike in mortgage banking revenues boosted noninterest income — and helped prop up earnings — even as overdraft, deposit-services and other fees plummeted during coronavirus-related lockdowns.
But mortgage banking revenues are expected to slow in 2021, reducing overall fee income and tightening already narrow profit margins, according to industry observers. Exactly how tight will depend on the speed of COVID-19 vaccine distribution across the country and the swiftness of the economic recovery.
One thing, however, is certain, according to Scott Siefers, an analyst at Piper Sandler.
“It’s going to be tough to do an encore to 2020,” he said.
Aggregate data models from Piper Sandler and others point to a clear reduction in noninterest income next year across banks of all sizes, driven by the anticipated slip in mortgage banking fees, which swelled this year as consumers took advantage of low rates to purchase or refinance homes.
A report from Wedbush Securities projects that fee income among the nine regional banks the firm covers will rise just 0.8% in 2021 and flatten in 2022, following an estimated 4.9% increase in 2020. Mortgage fee income at those companies is expected to fall 11.5% in 2021 “as the tailwind from the [mortgage] refinancing boom runs its course,” the report said.
“The way we’ve been thinking about it, mortgage banking has been a great hedge to this low-rate environment, and growth in fee income has been instrumental in being supportive of total revenues,” Wedbush analyst Peter Winter said. As for next year, “I think there will be more pressure on banks that were more reliant on mortgage banking. They probably won’t be able to repeat [the highs] of this year.”
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Big banks in particular have relied on mortgage operations and investment banking services to counterbalance the Federal Reserve Board’s interest rate cut in March and the general pandemic-induced slowdown in loan demand. Several continue to invest in fee-based businesses, including Truist Financial, which was set to complete five small insurance acquisitions this month. It said the deals will add more than $100 million in annual revenue to its wholesale unit.
“It's a big business for us, has been [and] continues to be,” Kelly King, the chairman and CEO of the Charlotte, N.C., company, said this month during an industry conference. “And it's excellent in terms of diversification and, if anything, out of COVID we've learned and [learned from] the Great Recession just before, diversification is a big deal.”
JPMorgan Chase reported a 7% quarter-over-quarter increase in noninterest revenue as of Sept. 30, compared with a 9% drop in net interest income. Wells Fargo said fee income rose 19% from the second quarter to the third quarter, driven upward by an increase in mortgage banking income, trust and investment fees, deposit-related fees and card fees.
At the end of the third quarter, KeyCorp in Cleveland reported an increase in noninterest income of 5% from a year earlier. Chairman and CEO Chris Gorman, who spoke after King at the industry conference, said the $170.5 billion-asset company’s business model “uniquely positions [it] to grow fee income,” which makes up about 40% of total revenue.
“Despite the challenging backdrop, we have grown noninterest income on a year-over-year basis,” Gorman said. “We are well positioned to continue to grow our fee income businesses and specifically I am referencing investment banking, payments and consumer banking business.”
Meanwhile, Citizens Financial Group in Providence, R.I., reported a 33% increase in noninterest income for the third quarter. Much of the uptick was driven by a surge in mortgage banking revenue, which climbed 145%.
The $179.2 billion-asset Citizens, which has spent much of the past six years building out fee-income businesses in mortgage, wealth management and capital markets, said mortgage banking fees softened net interest margin compression during the third quarter. Given this year’s performance, analyst consensus calls for a 20% to 25% increase in the bank’s fee income versus 2019.
The company remains optimistic about noninterest revenues, but there will be challenges next year. Chief Financial Officer John Woods this week said “volume will be elevated, [but] revenue will be down.”
“There are headwinds that all banks are facing with respect to net interest income, due to rates,” Woods said. Overall, “we do acknowledge that mortgage [fees] will decline from 2020, but it will be meaningfully above 2019. We still think the mortgage market in 2021 will be much higher than 2019.”
The Fed has said that it expects to keep rates near zero through 2023 to help the economy stabilize after the pandemic. For that reason and others, Piper Sandler said in a research note that it expects median net interest margins across all banks to fall 5 basis points to 3.25% next year. It expects net interest income to fall 0.3% in 2021.
To be sure, there are some factors that could ease the blow to profits.
For one, the unusually high mortgage fees and revenue from asset and wealth management businesses this year should provide extra cushion for a while, Siefers said. And he expects more merger and acquisition activity, especially in asset and wealth management, which would help buyers preserve or expand noninterest income. Indeed, executives at JPMorgan and Citizens have said they are looking for acquisition opportunities in those segments.
Also, if consumer spending picks up, deposit balances will fall, which could mean improvements in deposit service charges, Winter said.
Moreover, once the economy improves, banks could consider releasing some reserves, said Onker Basu, a former banker who is now a bank consultant at Cornerstone Advisors.
“It could be — and this is the unknown — that if [loan-loss] provisions come back into profit lines, you’ll start to see earnings numbers change as a result of that,” he said. “But that depends on how banks start feeling about their portfolios and the performance of those portfolios relative to what they set aside.”
Still, Basu said, reduced fee income means next year will be “a less sunny picture” for bank earnings.
