What is a Noninterest Expense
A noninterest expense is an operating expense of a bank or financial institution that is classified separately from interest expense and provision for credit losses. Noninterest expenses are associated with employee salaries and benefits, information technology (IT), rent, telecommunication services, taxes, professional services, marketing, amortization of intangibles and other general operating expenses.
BREAKING DOWN Noninterest Expense
A bank has two major buckets of expenses: interest and noninterest. Interest expenses are incurred from deposits, short-term and long-term loans and trading account liabilities. Noninterest expenses represent operating expenses of the bank, the majority of which is comprised of personnel costs. Occupancy and IT costs are also material cost components, as are professional fees, particularly for legal services to negotiate settlements for past, ongoing and future fraudulent activities by the bank. In the aggregate, noninterest expense is considered overhead of the bank, which is used to calculate the overhead ratio of the bank for trend analysis and cross-comparisons with peers. Noninterest expense divided by average assets is the overhead ratio. When an overhead ratio becomes unacceptably high for a prolonged period, a bank will usually attack personnel costs first, as this makes up the majority of noninterest expense.
Also, shareholders in recent years have paid more attention to executive compensation to make sure these managers are not receiving unwarranted pay. Shareholders are generally in favor of competitive compensation, but they want to see that overall personnel costs are kept within a reasonable range.
Noninterest Expenses Vary By Bank Type
Noninterest expenses are typically higher at investment banks than commercial banks. The main reason is that investment banks rely more on trading, asset management and capital markets advisory services, which all require higher levels of compensation for employees. Lending activities by a commercial bank do not call for Wall Street-like compensation. The differences show up in the numbers. In 2016, Morgan Stanley's noninterest expenses comprised 75% of revenues. Compensation alone made up 46% of revenues. By contrast, Wells Fargo's total noninterest expenses and employee costs were 58% and 30%, respectively, of revenue.