Why Have Net Interest Margins Trended Lower For Some Of The Largest U.S. Banks?

There was a sequential decline in the net interest margin (NIM) figure for three of the five largest U.S. banks over Q2 – a trend that stands out given the steady increase in the key metric for the U.S. banking industry in each of the last several quarters thanks to the Fed’s ongoing rate hike process. As we detail below, a flattening yield curve was responsible for the modest decline in the NIM figures for JPMorgan, Bank of America as well as U.S. Bancorp.

We capture the trends in net interest margin for each of the five largest commercial banks in the country – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, U.S. Bancorp – through interactive dashboards, while also detailing the impact of changes in the metric on their share price.

The NIM figures for individual banks are taken from their respective earnings releases, while the figure for the industry is as compiled by the Federal Reserve Bank of St. Louis here. The average figure shown here is the weighted average figure obtained by weighing the net interest income figure for individual banks with their respective portfolios of interest-earning assets.

Notably, there is a sizable variance in the NIM figure among these banks. This is primarily due to their varied business models, with JPMorgan and Citigroup having more diversified banking operations compared to their peers. Another important factor that impacts net interest margins is the proportion of various loans in the total loan portfolios of these banks, as yields for some loan types like credit cards (which are unsecured) are inherently much higher than those for commercial loans (which are usually backed by collateral).

The chart below captures changes in the NIM figure for all these banks as well as the overall industry over the last five quarters.

The low interest rate environment that has been prevalent since the economic downturn of 2008 put considerable pressure on interest margins for all U.S. banks over 2012-2015. However, the NIM figure for the industry has been upbeat over the last couple of years, as the interest rate environment improved thanks to the Fed’s rate hike process. The average net interest margin figure for the U.S. banking industry is now 3.30% – up from the record low of 2.95% in Q1 2015.

As seen in the chart above, the NIM figure for U.S. Bancorp, JPMorgan and Bank of America followed the upward trend seen across the industry over Q2 2017 – Q1 2018 before falling slightly in Q2. We attribute this decline to the flattening yield curve for the quarter, which resulted in their net interest income increasing at a slower rate than their net interest expense for the period. This in turn, had a negative impact on their net interest margin figure. Among the remaining two banks, Citigroup’s NIM figure is less sensitive to changes in U.S. interest rates due to its geographically diversified business model, and Wells Fargo’s NIM figure jumped considerably because of the bank’s efforts to weed out low yielding loans and liquidate non-core deposits over recent months to comply with the Fed’s growth restriction order.

With the yield curve improving considerably over July and August, the largest U.S. banks are expected to report a healthy improvement in their NIM figure for the current quarter.

Details about how changes to key traditional banking parameters (like NIM) affect the share price of the five largest U.S. commercial banks can be found in our interactive model for JPMorgan Chase | Bank of America | Wells Fargo | Citigroup | U.S. Bancorp

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