Higher remittances could aid fee income of select banks

Federal Bank, City Union Bank, and South Indian Bank are seen as key beneficiaries

Stocks of south-based Federal Bank, City Union Bank, and South Indian Bank have outperformed the S&P BSE Sensex as well as the S&P BSE Bankex since June 24. These stocks surged nine, 16, and 10 per cent, respectively, ahead of the three-four per cent surge posted by the two benchmark indices in this period. A key reason behind this outperformance is these banks could witness higher remittance income following UK's June 24 vote to exit the European Union.

After the vote, the pound has fallen five per cent against the dollar and the rupee. As Europe and the rest of the world adapt to the changes as well as challenges following the UK vote, currencies worldwide are likely to witness volatility. "This volatility could lead to a surge in remittances to India,” said Nitin Aggarwal, analyst at Antique Stock Broking. A remittance is the funds an expatriate sends to their country of origin. An expatriate is a person living in a country that is not their own.

  Suresh Ganapathy, analyst at Macquarie Capital, said: "Remittances through Europe and UK might pick up. Indians earning in euro and pound will remit to India because the rupee is falling at a lower rate. Typically, south-based banks get more remittances and stand to gain. Banks getting more remittances from Europe and the UK stand to gain more." About a fourth of remittances into India are from Europe and the UK.

This augurs well for banks having a larger income from remittances-related fees. Banks having higher NRI (non-resident Indian) deposits stand to gain. Among larger banks, ICICI Bank, stands to gain, given its strong remittance and NRI deposits bases.

“If remittance picks up, driven by fall in foreign currencies, we expect remittance-related fee income growth to contribute two to four per cent additional growth to overall fee income for the underlying banks,” said Aggarwal. He said remittance-related income (both fee income and exchange gains) forms five-eight per cent of total fee income for select banks. For FY16, fee income as a percentage of total income (net interest income plus non-interest income) stood at 6.4 per cent for Federal Bank, 3.7 per cent for City Union Bank, and 19.6 per cent for South Indian Bank. Amid reducing credit growth and slower uptick in macroeconomic growth, fee income of most banks have been hit. Thus, a rise in fee income from remittances is a positive.

The contribution of remittances to total non-interest income depends on the fees charged by the banks for such remittances.

Currently, the average charge for remittances via banks stands at 0.4 per cent. These developments may also aid growth of NRI deposits.