A Quick Comparison Of Interest Margins For The Largest U.S. Banks

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Net interest margin (NIM) figures for all banks in the U.S. have been on a steady decline over the last three years as a direct result of the low interest rates being maintained by the Federal Reserve since the economic downturn of 2008. This in turn has put pressure on bank revenues over the period, with the banks being forced to resort to fee-based revenue sources and improve operating efficiency in order to boost profitability. But not all banks have been affected equally by shrinking interest margins. 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 compared to their larger competitors JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), who rely on a range of diversified financial services to generate revenues.

The Fed’s decision to taper its economic stimulus package late last year helped NIM figures improve for the first time in three years in Q4 2013. But with the market absorbing the impact of the Fed’s lower asset purchase plan and with deposits continuing to grow at a faster rate than loans, interest margin figures fell further over the first quarter of the year. In this article, which is a part of our series on the relative performance of the country’s five largest commercial banks on several key metrics, we detail how these banks’ NIM figures have changed over the recent quarters and what to expect in the coming quarters.

See our full analysis for Bank of AmericaCitigroupJPMorganWells FargoU.S. Bancorp

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The Federal Reserve set its benchmark interest rates at 0% to 0.25% in December 2008, and has maintained them at that level since. When federal fund rates are kept low, banks can afford to give out loans — be it personal loans, commercial loans or mortgages — at lower interest rates. This should in turn encourage individuals and companies to borrow, allowing the economy to slowly return to health. The policy, coupled with the Fed’s asset purchase program, has played an important role in jump-starting the U.S. economy over the years.

But the low interest rate environment that has prevailed for nearly six years now also made it difficult for investors to find investment options that yield high returns. This affected banks in particular, as they were forced to invest the cash from securities that matured into ones that had lower yields – cutting into their interest revenues. Moreover, retail as well as institutional investors also started stashing more money away in interest-bearing bank deposits due to the lack of significantly better options – further straining NIM figures by increasing the banks’ interest expenses.

The table below shows the NIM figures for the five largest banks for Q1 2011 as well as each of the last ten 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 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
U.S. Bancorp 3.69% 3.60% 3.58% 3.59% 3.55% 3.48% 3.43% 3.43% 3.40% 3.35% 3.27%
Wells Fargo 4.05% 3.91% 3.91% 3.66% 3.56% 3.48% 3.46% 3.38% 3.26% 3.20% 3.15%
Citigroup 2.88% 2.90% 2.81% 2.86% 2.93% 2.88% 2.85% 2.81% 2.88% 2.90% 2.87%
Bank of America 2.66% 2.50% 2.20% 2.31% 2.34% 2.36% 2.35% 2.33% 2.44% 2.29% 2.22%
JPMorgan 2.89% 2.61% 2.47% 2.43% 2.40% 2.37% 2.20% 2.18% 2.20% 2.20% 2.19%
Weighted Avg. 3.05% 2.92% 2.78% 2.77% 2.77% 2.74% 2.67% 2.64% 2.67% 2.63% 2.59%

As is evident from the table, NIM figures for all the banks fell considerably from Q1 2011 to Q3 2013, before finally increasing for the first time in Q4 2013. It should be noted that the increase is only in the interest margins at the three largest banks. While it can be argued that the NIM figures at these banks were quite low compared to the other two, it must be remembered that the reason for this is the markedly different business models and capital structures for these two groups of banks.

The Fed’s plans to taper its asset purchase program (see The Fed’s Plans To Taper Asset Purchases: Good Or Bad News?) combined with the eventual increase in federal fund rates, will result in net interest margin figures at banks moving higher in the long run. But in the meantime, the NIM figures are likely to move erratically – especially for banks which rely more heavily on loans and deposits to make money – as the low benchmark rates will continue to fuel a growth in deposits at a faster rate than loans. At the same time, as liquidity in the U.S. market dries up, interest income will improve. These opposing market forces will take a few quarters to normalize interest margins.

This trend is good news for the banking sector, and we expect all commercial banks to report higher interest margins by the end of this year. You can get a better understanding of the partial impact of changing net interest margins on a bank’s total value by making changes to the chart below, which represents U.S. Bancorp’s NIM on outstanding mortgages.

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