What Is a Noninterest Expense?

What Is a Noninterest Expense?

Let me explain what a noninterest expense is: it's an operating cost for a bank or financial institution that we classify separately from interest expenses and provisions for credit losses. You should know that examples include employee salaries, bonuses, and benefits; equipment rental or leasing; information technology costs; rent, telecommunication services, taxes, professional services, and marketing; and the amortization of intangibles.

Key Takeaways

Noninterest expenses are the fixed operating costs of a bank, such as salaries and rent. You can offset them with service fees like those from loan originations, late charges, annual fees, and credit facility fees. Keep in mind that these expenses are typically higher for investment banks than commercial banks, even if they appear lower, because services like trading, asset management, and capital markets advisory are costly.

Understanding Noninterest Expenses

A bank has two main categories of expenses: interest and noninterest. Interest expenses come from deposits, short-term and long-term loans, and trading account liabilities. In contrast, a noninterest expense is any cost other than interest payments on deposits and bonds—these are often the operational expenses you incur in the daily running of the bank.

It's important to note that a noninterest expense represents a cost not directly associated with attracting and keeping a depositor's funds.

The Main Components of Noninterest Expenses

Noninterest expenses are sizeable, and you must manage them carefully to maximize profits—otherwise, excessive ones will directly hit your bottom line. These expenses represent the operating costs of the bank, with the majority being personnel costs. Occupancy and IT costs are also significant, as are professional fees, especially for legal services to handle settlements for fraudulent activities affecting the bank.

In total, noninterest expense is considered bank overhead, and we use it to calculate the overhead ratio for trend analysis and comparisons with peers. You get the overhead ratio by dividing noninterest expense by average assets. If this ratio stays unacceptably high for too long, a bank will usually tackle personnel costs first, since human capital makes up most of the noninterest expense.

Here's a fast fact: Shareholders have been paying more attention to executive compensation in recent years to ensure managers aren't getting unwarranted pay. They generally favor competitive compensation but want overall personnel costs to stay within a reasonable range.

Noninterest Expenses by Bank Type

Noninterest expenses are typically higher for investment banks than commercial banks, but this can be hidden in the numbers—it depends on employee numbers and compensation. For instance, investment banks rely more on trading, asset management, and capital markets advisory, which require higher pay but fewer employees. Commercial banks, on the other hand, focus on lending that doesn't need Wall Street-level compensation, and they serve markets requiring more staff.

Take Wells Fargo with about 247,000 employees versus Morgan Stanley's 60,000. In 2021, Morgan Stanley's noninterest expenses were 66% of revenues, with compensation at about 38%. For Wells Fargo, total noninterest expenses and employee costs were 69% and 45% of revenues, respectively. Personnel costs as a share of revenues are close, but differences stem from employee counts and pay levels.

What Is the Largest Noninterest Expense for a Bank?

It can vary by bank, but personnel costs generally make up the biggest portion of noninterest expenses. For example, Wells Fargo's personnel costs in 2021 were 45% of revenues—$35.5 billion in noninterest expenses out of $78.5 billion in revenues.

What Is Noninterest Income for Banks?

Noninterest income is revenue from sources that don't generate interest, such as fees, commissions, investment gains, and other operational income.

How Do You Calculate Noninterest Income?

You generally calculate noninterest income per instrument or service. For instance, if a bank loans money with a $500 origination fee and $100 in service charges, the noninterest income for that loan is $600, while interest income isn't included.

The Bottom Line

Noninterest expenses are the bank's costs that aren't interest paid to customers or other banks, like purchasing equipment, contracting professional services, wages and salaries, and advertising. Banks distinguish between interest and noninterest expenses because the latter are fixed operating costs, unlike interest. This separation creates transparency, helping interested parties understand expenses better and allowing the bank to manage finances for maximum profits.