Banks' non-interest income may come under pressure

PETALING JAYA: Non-interest income, which makes up between 20% and 35% of the banking system’s total income, could come under pressure this year in view of the recent surge in bond yields, which could dampen capital-raising activities and impact banks’ fee-based income.

Analysts said the US Federal Reserve’s intention to taper off its US$85bil (RM278bil) a month bond-buying programme this year or early 2014 had led to the recent spike in bond yields in emerging markets, including Malaysia, which could potentially slow fee-based or non-interest income of banks.

A month-long selling has pushed the 10-year Malaysian Government bond yields to their highest in 2½ years.

RAM Ratings co-head of financial institution ratings Sophia Lee told StarBiz that banks’ non-interest income would be affected by the recent spike in bond yields, if they had a large proportion of longer tenure securities that were held for trading.

“If the securities are classified as available for sale, the mark-to-market losses from these securities would affect the capital ratios. The yield spike for longer tenure securities seems to be more apparent although yields of shorter tenure securities have also increased.

“We note that some banks have switched from holding longer tenure securities to shorter tenures beginning this year, which could mitigate the impact to some extent. Most banks also hedge against interest rate risks, which might lessen their losses,” she said.

Lee said banks’ proportion of non-interest income to gross income ranged from 20% to 35%, given that lending was still their mainstay.

With keen competition in the lending market, tighter consumer lending regulations and increasingly stricter capital and liquidity requirements under Basel III, she said banks were striving to build up their non-interest income.

In terms of non-interest income, she said wealth management, bancassurance, transaction banking, treasury and investment banking solutions were the main areas of focus for banks.

Alliance Research banking analyst Cheah King Yoong, meanwhile, expressed concerns that rising bond yields and volatility in equities in emerging markets as a result of the Fed’s planned move could hold up capital-raising activities in the region.

He said that recent meetings with the management of banking groups revealed many capital-raising activities for Economic Transformation Programme (ETP)-related projects had been deferred to next year, while the investment banking mandates secured were mainly from private initiatives.