Abstract
Purpose – The aim of this article is to present results of research on the relation between non-interest income and bank’s profitability for Liechtenstein banks specialized in private banking. Design/Methodology/Approach – The study examines 12 Liechtenstein banks specialized in private banking and wealth management services in the period from 2014 to 2016. Example of Liechtenstein has been chosen as the country is a significant European private banking centre. Data used in the research come from financial statements published by the banks. The relationship between profitability, presented as return on equity (ROE) and return on assets (ROA), and non-interest to interest income ratio has been examined by Pearson correlation coefficient. Findings – Results show a negative correlation between non-interest to interest income ratio and ROA. No relevant correlation had been found between non-interest to interest income ratio and ROE. Originality/Value – Most of the researchers investigating the relation between non-interest income and profitability of banks show opposite results to those presented in this paper. Available studies are concentrated on markets dominated by retail and corporate banking services generating mainly interest income. This paper treats the problem of non-interest income’s relation to banks’ profitability from the perspective of private banking, a specific branch of financial services focused on services generating earnings which are not based on interest-based products. Article type – Research paper.
Highlights
Traditional role of bank acting as intermediary between deposits’ holders and borrowers determines interest as the main source of bank income
U and non-interest income was observed in many studies
Their authors usually claim that higher share of non-interest income is related to offering wealth-management products, which are generally more profitable than standard bank products based on interest
Summary
Traditional role of bank acting as intermediary between deposits’ holders and borrowers determines interest as the main source of bank income. Several studies show, that high level of non-interest income increases risk, as in comparison with interest income it is usually more volatile and depends significantly on external factors (DeYoung, Roland, 2001; Demirgüç-Kunt, Huizinga, 2010). Studies on determinants of banks’ profitability very often examine non-interest income among other internal factors, there is still no unanimous answer to the International Journal of Synergy and Research. IJSR 6 question about influence of non-interest income into profitability and risk level of bank as many studies bring opposite results. Among financial institutions with high share of non-interest income are banks specialized in private banking services, as serving wealthy clients, they sell mainly wealth management services generating fee-based income. Private banks, especially these operating in off-shore banking centres, often observe relatively high share of income from payment transactions fees. Private banks, especially these operating in off-shore banking centres, often observe relatively high share of income from payment transactions fees. Birchler et al (2015) expose in their study non-interest income as characteristic factor for banks specialized in private banking, selecting for their studies on private banking, entities which show observable strategic focus on private banking, and generate more than one third of their total revenues by fees and commissions
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