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Growth in fee income helps boost banks’ profits in Q2

FE Bureau
The contribution of fee income to total income slipped to 6.61% from 7.36% a year ago.

Growth in fee income helped boost banks' profits in the September quarter at a time when credit growth in the system was slowing down. This is particularly true for private banks, which saw a smart year-on-year (y-o-y) growth in fee income.

Fee income includes revenue earned on retail and corporate banking fees, brokerage or commission earned on forex transactions, distribution of third party products like mutual funds, insurance and financial advisory services.

India's largest private sector lender HDFC Bank saw its fee income rise 23% y-o-y to Rs 4,054 crore. Fees and commissions constituted 72.5% of its other income.

Jimmy Tata, chief risk officer, HDFC Bank, told analysts on a post-results call that payments had seen very strong growth, which led to growth in fees and income.

Earnings in the insurance business were much better than in the past and this helped offset de-growth in mutual fund income, Tata added. Among other components contributing to the non-interest income, treasury gains jumped to Rs 480.7 crore against a loss of `32.8 crore in the year-ago period. Besides fee income and treasury gains, foreign exchange & derivatives revenue and other miscellaneous income also contribute to the non-interest income at HDFC Bank.

Public sector lender State Bank of India (SBI) saw a relatively smaller growth in fee income, which stood at Rs 5,040 crore in Q2FY20, up 0.5% from Q2FY19. The contribution of fee income to total income slipped to 6.61% from 7.36% a year ago.

Kajal Gandhi, vice-president-research, ICICI Direct, said, "Private banks have a higher fee income because of their higher share of distribution income and consistent credit growth compared to public sector banks." The fee income also increases when the share of retail loans in a bank is high, she added. Fee income of Axis Bank grew 11% year-on-year to Rs 2,649 crore, led by a 16% growth in retail fee income. "Within retail, fees from our cards business grew strongly at 21% year-on-year. The cards business now constitutes 26% of total bank-level fees in this quarter. Corporate credit-related fees grew by 13% year-on-year in the second quarter," said Jairam Sridharan, group executive and chief financial officer, Axis Bank, during the Q2FY20 earnings call.

ICICI Bank saw its fee income grow by 16.1% year-on-year to `3478 crore in the quarter, with retail fee income growing by 20.5% y-o-y. Retail fees now constitutes about 74% of overall fees, said Rakesh Jha, chief financial officer, ICICI Bank. The share of fee income as a part of the total income for the quarter stood at 15.29%, compared to 16.41% a year ago. Fee income at Kotak Mahindra Bank rose 12.6% y-o-y to Rs 1,162 crore. Punjab National Bank's (PNB) fee income rose 4.5% y-o-y to Rs 1,051 crore.

Analysts expect the fee income of private banks to increase further. "Fee income of banks has been declining over the past few years due to low credit growth and high competition. But now, in the near-term, the competition is down as NBFCs (non-banking finance companies) are out of favour, and PSU banks are going to be occupied with merger process, which may benefit private lenders," said Gandhi.