U.S. Banks’ Net Interest Margin Figures Higher In Q1 Thanks To Fed’s Rate Hikes

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The Fed’s decision to hike benchmark interest rates last December, and again this March, arrested the steady decline in net interest margin (NIM) figures for the largest U.S. banks in Q1. Three of the five largest banks in the country reported a sequential increase in NIM for the quarter. However, the average interest margin for these five banks is still well below the average NIM figure for the U.S. banking industry.

CB_QA_NIM_17Q1

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 NIM figure for individual banks with their respective portfolio of interest-earning assets.

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

CB_QA_NIMChange_17Q1

Notably, there is a sizable difference 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 the NIM figure is the proportion of various loans in the total loan portfolio 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 low interest rate environment that has been prevalent since the economic downturn of 2008 has put pressure on interest margins for all U.S. banks over recent years. In order to fully understand the overall trend in the table above, it must first be remembered that the banking industry is very seasonal, with loan volumes being the lowest for the first quarter of the year and increasing sequentially to peak in the fourth quarter. This, in turn, has a direct impact on NIM figures for the industry – usually making them dip sharply from the fourth quarter of a year to the first quarter of the next. This trend was evident in Q1 2016 too despite the Fed’s first rate hike since the downturn in December 2015.

However, the NIM figure for the industry witnessed a sharp increase in Q1 2017 as the Fed resumed its rate hike process. The trend is mirrored by Bank of America, JPMorgan and U.S. Bancorp too. Among the two remaining banks, Citigroup’s nearly constant NIM figure is as expected. After all, Citigroup’s NIM figure bucked the trend of an overall decline for its peers over 2010-16 due to its geographically diversified business model, which acts as a hedge against low interest rates in the U.S. As for Wells Fargo, the sequential decline despite the improved interest rate environment can be attributed to its poor retail loan growth over recent quarters in the wake of its fake account opening scandal.

With the Fed looking to hike interest rates at least thrice each year over 2017-2019, NIM figures for all these banks should rise steadily over subsequent quarters. You can see how changes to U.S. Bancorp’s net interest margin for mortgages impacts our price estimate for the bank by modifying to the chart below.

 

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