Q1 2015 U.S. Banking Review: Net Interest Margin

-13.52%
Downside
57.77
Market
49.96
Trefis
WFC: Wells Fargo logo
WFC
Wells Fargo

The share prices of U.S. banks took a hit over trading last Friday, May 15, after a string of indicators showed that the U.S. economy was losing momentum. Interestingly, reports of a decline in retail sales, industrial production as well as consumer confidence had little impact on the larger equity market, with the S&P 500 remaining at a record high. The discrepancy in the way investors’ reacted to the bad news with respect to the financial sector stems from the Fed’s likely response over the coming months. Given the slowing economic growth, investors now expect the Fed to maintain interest rates at their current low levels for a couple more quarters at least. While this will boost the performance of many sectors, it is bad news for the financial firms who are reeling under the impact of the prevailing low interest rate environment.

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 models compared to their larger 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 five quarters as well as for the last three years. 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
U.S. Bancorp 3.35% 3.27% 3.16% 3.14% 3.08%
Wells Fargo 3.20% 3.15% 3.06% 3.04% 2.95%
Citigroup 2.90% 2.87% 2.91% 2.92% 2.92%
Bank of America 2.29% 2.22% 2.29% 2.18% 2.17%
JPMorgan 2.20% 2.19% 2.19% 2.14% 2.07%
Weighted Avg. 2.63% 2.59% 2.60% 2.55% 2.51%

As is evident from the table, NIM figures for all the banks have fallen steadily over recent quarters. In fact, the interest margin has seen an uptick in only 2 quarters over the last three years – in Q4 2013 and in Q3 2014. Another important thing to note is the actual decrease in NIM figures for each of the banks. Wells Fargo has borne the brunt of low interest rates the most, with its interest margin shrinking 110 basis points (1.1 percentage point) over the Q1 2011 – Q1 2015 period. JPMorgan has also seen a marked 82 basis point (0.82 percentage point) reduction in NIM for this period. In contrast, Citigroup has maintained its NIM figure almost constant at 2.9% over the years. This is because the geographically diversified banking giant is able to raise cheap funds outside the U.S., and its overall NIM figure is also less sensitive to the U.S. interest-rate environment.

The chart below makes it easier to compare the relative changes in NIM figures for these five banks since Q1 2011.

With the Fed discontinuing its QE program last October, investors started the year with expectations of a rate hike as early as this June. But the sluggish pace of recovery over recent months has made this a remote possibility with the Fed likely to delay any changes to the federal funds rate to early next year. When the Fed does raise rates, the net interest margin figures at banks should start to bounce back. But in the meantime, the NIM figures are likely to remain under pressure – especially for banks which rely more heavily on loans and deposits – as the low benchmark rates will continue to fuel faster growth in deposits than loans.

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