Take a minute to guess which bank makes the largest percentage of its profits from fees.
If you picked Bank of America or Wells Fargo, you're wrong.
According to a ranking from Bank Director magazine, Charlotte-based Bank of America, the second-largest U.S. bank, and San Francisco-based Wells, the fourth-largest, aren't even in the top 10.
The list, which the magazine compiled for the first time and released Tuesday, ranks 50 publicly traded banks based on their average ratio of noninterest income to total operating revenue for 2011 and 2012.
It puts Bank of America in 13th place and Wells Fargo in 14th. Noninterest income made up 48.1 percent of Bank of America's operating revenue, while it was 47.5 percent for Wells Fargo. The only other North Carolina-based bank on the list is BB&T, at No. 34 with 37.6 percent.
Smaller banks -- those with less in assets -- tended to rank higher. For example, No. 1 is Bank of New York Mellon Corp., which got 79.4 percent of its profits from noninterest income.
The magazine points out that the banks and thrifts at the top of the list do very little lending. Instead, they make the bulk of their revenue by providing investment-management and transaction-processing services, such as corporate trust and securities clearing for institutional investors -- and they charge fees for such activities.
The magazine said fee income falls into three categories:
- Fees charged to consumers. This includes fees for debit card transactions and using overdraft protection. But, the magazine says, regulations have cut sharply into consumer-based fees at most banks.
- What banks earn by selling home and automobile loans to third parties that turn them into securities for investors. Those fees have generated a lot of income for banks that took advantage of the refinancing boom by originating mortgages they sold to Fannie Mae and Freddie Mac.
- What banks make from providing services, such as investment banking, insurance brokerage and cash-management.
At Wells Fargo, mortgage banking fees generated 27 percent of its noninterest income in 2012. But the bank made slightly more from trust and investment-management activities last year.
The magazine said there can be downsides to having a business model that emphasizes fees for services. For example, securities analysts and institutional investors place different values on some forms of fee income. Those based on activities that tend to be cyclical or highly volatile are considered to be less desirable than more stable drivers, according to the magazine.