Fee Income at Premium as Crisis Threatens Credit

Companies today have to work smarter and harder to survive the coronavirus crisis, said Green Dot Corp. CEO Daniel Henry in the company’s recent earnings call.

Henry joined Pasadena, California-based Green Dot as CEO on March 26, and has been working remotely to get up to speed on the $3 billion financial company’s operations, which include prepaid cards, tax processing and a banking platform. Those diversified business lines are a source of strength, he said.

“We’re in a much better position than just kind of a monoline neo-bank to weather the storm,” he says. “We’ve got positive free cash flows, strong revenues and cash in the bank.”

After a couple of years of moderately rising interest rates, the Federal Reserve began to back off mid-2019. They dramatically dropped them to zero in February as one tool to fight the economic downturn caused by the Covid-19 pandemic and have promised to keep them low until the economy shows firm signs of recovery. Now, it looks like the industry needs to strap in for another lengthy period of low interest rates.

All this puts further pressure on already-squeezed net interest margins.

While the spread between deposits and loans represents a bank’s traditional method of generating revenue, banks also focus on fee income sources to drive profitability. Business lines that expand non-interest income opportunities could be particularly valuable in the current environment.

With this in mind, Bank Director ranked publicly traded institutions based on noninterest income as a percentage of net income, using year-end 2019 data from S&P Global Market Intelligence. We focused on profitable retail banks with a return on average assets exceeding 1.3%.

Many of these banks rely on traditional sources of noninterest income – mortgages, insurance, asset management – but two differentiate themselves through unique business models.

Green Dot topped the ranking, with the bulk of its fees generated through prepaid card transactions. It also earns revenue through its Banking-as-a-Service arrangements with companies such as Uber Technologies, Apple, Intuit and long-term partner Walmart.

Meta Financial Group deploys a similar model, offering prepaid cards and tax products. The Sioux Falls, South Dakota-based bank will soon issue federal stimulus payments via prepaid cards to almost four million Americans through a partnership with the U.S. Treasury.

The remaining banks in our list take a more traditional approach.

Institutions like Dallas-based Hilltop Holdings primarily generate fee income through mortgage lending. Keefe, Bruyette & Wood’s managing director Brady Gailey believes the low-rate environment will favor similar financial institutions. “Hilltop has a very strong mortgage operation … which should do even better this year, given the lower rate backdrop that we have now,” he says.

The $15.7 billion bank announced the sale of its insurance unit, National Lloyds Corp., earlier this year; that deal is expected to close in the second quarter. Even without its insurance division, Hilltop maintains diverse fee income streams, says Gailey, through mortgage, investment banking (HilltopSecurities) and commercial banking.

Hilltop CEO Jeremy Ford said in a January earnings call that the insurance business wasn’t “core. … this will allow us to really focus more on those three businesses and grow them.”

As the fifth-largest insurance broker in the U.S., Charlotte, North Carolina-based Truist Financial Corp. enjoys operating leverage and pricing power, according to Christopher Marinac, the director of research at Janney Montgomery Scott. “[Insurance will] be a key piece of that income stream,” he says. “I think insurance is going to be something that every bank wishes they had – but Truist truly does have it, and I think you’re going to see them take advantage of that.”

In Green Dot’s earnings call, Henry said he’s still evaluating the company’s various business lines. But with Covid-19 pushing consumers to dramatically increase their use of electronic payment methods – both for online shopping and more hygienic in-person transactions – he’s bullish on payments.

“Covid is really forcing a lot of consumers [to] search out a digital solution,” Henry said. Visa recently reported that while face-to-face transactions declined significantly in April, there was an 18% uptick in digital commerce spending.

Recently, Green Dot investigated a spike in card sales in a particular area. It turned out that a local cable company’s offices were closed due to Covid-19. A sign on the company’s door instructed customers wanting to make in-person payments to go to a store across the street and buy a Green Dot card so they could make their payment electronically.

“A lot of the consumers that were hanging on to cash over the last few months really didn’t have an option and got pushed into the electronic payments world,” he said. “That will definitely benefit us at Green Dot.”

Top Fee Income Generators

Sources: S&P Global Market Intelligence, bank 10-Ks