Q2 2015 U.S. Banking Review: Net Interest Margin

-5.26%
Downside
37.92
Market
35.93
Trefis
BAC: Bank of America logo
BAC
Bank of America

Bank shares bore the brunt of investor disappointment on Thursday, August 20, after details about the most recent Federal Reserve meeting all but ended any hope of a hike in benchmark interest rates this year. [1] The minutes of the Fed’s monetary policy meeting held in late July saw concerns expressed about the sub-par inflation rate, and there were hints that the Fed may wait longer before raising interest rates from the record low levels they have lingered around since the economic downturn of 2008. This will mean that financial firms will have to brave the prevailing low interest rate environment for longer than expected – a conclusion that led the KBW Bank Index nearly 3% lower.

Shrinking net interest margin (NIM) figures have put pressure on revenues across the banking sector since early 2011, and the banks have had to put in a lot of effort to boost revenues from fee-based services and cut costs to offset this impact. Among the country’s largest commercial banks, Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) have been hit the most due to their traditional loans-and-deposits business model,s compared to their competitors JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), which rely on a range of diversified financial services to generate revenues. In this article, we detail how these banks’ NIM figures have changed over recent quarters and what to expect going forward.

See our full analysis for Bank of America | Citigroup | JPMorgan | Wells Fargo | U.S. Bancorp

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The Federal Reserve set its benchmark interest rates between 0% to 0.25% in December 2008, and has maintained them at that level since then. While that helped jump-start lending and borrowing, it has also made it difficult for investors to find investment options that yield high returns. This has affected banks’ interest margins. The table below shows the NIM figures for the five largest banks for the last six quarters. The figures were reported by the banks in their respective quarterly SEC filings. The weighted average figure is arrived at by weighing each bank’s interest margin for the quarter with the average interest-earning assets it reported for the period.

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
U.S. Bancorp 3.35% 3.27% 3.16% 3.14% 3.08% 3.03%
Wells Fargo 3.20% 3.15% 3.06% 3.04% 2.95% 2.97%
Citigroup 2.90% 2.87% 2.91% 2.92% 2.92% 2.95%
Bank of America 2.29% 2.22% 2.29% 2.18% 2.17% 2.37%
JPMorgan 2.20% 2.19% 2.19% 2.14% 2.07% 2.09%
Weighted Avg. 2.63% 2.59% 2.60% 2.55% 2.51% 2.58%

Notably, Q2 2015 was one of the rare occasions over recent years when the overall net interest margin for the industry saw a sizable uptick. In fact, the last time each of the country’s four largest banks reported a quarter-on-quarter increase in NIM figure was Q4 2011. It must be mentioned here that the sharp 20 basis point (0.2% point) increase in NIM figure for Bank of America was a result of a one-time accounting gain related to its debt securities, but that does not take away from the fact that there has been an increase in NIM figures for the other major banking giants of at least 2 basis points.

The chart below makes it easier to compare the relative changes in NIM figures for these five banks since Q1 2011. The chart also includes the combined NIM figure for all U.S. banks over the period, as maintained by the Federal Reserve Bank of St. Louis. [2]

NIM-15Q2

Investors started the year with expectations of a rate hike as early as this June. But the sluggish pace of recovery over recent months indicates that the Fed will most likely maintain the federal funds rate at the current level for the rest of the year. This, in turn, will continue to put pressure on the NIM figure for the banking sector as a whole over the next few quarters – especially for banks that rely more heavily on loans and deposits. When the Fed does raise rates, the net interest margin figures at banks should bounce back, and will help banks leverage the notable increase in their loan portfolios since late 2011 to significantly boost profits.

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Notes:
  1. Minutes of the Federal Open Market Committee, July 28-29, 2015, Federal Reserve Website, Aug 19 2015 []
  2. Net Interest Margin for all U.S. Banks, St. Louis Fed Website []