Net Interest Margins Reverse 5-Year Decline In 2016; Largest Banks To Gain The Most From Improvement

March 28th, 2017 by Trefis Team
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The net interest margin (NIM) figures for the largest U.S. banks were well below the average figure for the industry in Q4 2016.

CB_QA_NIM_16Q4

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. 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 almost always unsecured) are inherently much higher than those for commercial loans (which usually are backed by collateral).

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

CB_QA_NIMChange_FY16

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. While the downward trend for the largest banks is evident in the table above, the industry saw a small improvement in full-year NIM figures for the first time in 2016 thanks to the combined effect of two 25 basis point rate hikes in December 2015 and December 2016. With the Fed announcing a rate hike again in March 2017, the regulator appears to be sticking to its timetable of three rate hikes each year over 2017-19. This should help net interest margins recover to levels seen around 2012 over coming years – significantly boosting revenues for the largest U.S. banks. This is because the largest banks have a much larger base of interest-earning assets, which makes their revenues more sensitive to NIM changes than their smaller counterparts.

You can see how changes to Wells Fargo’s net interest margin for mortgages impacts our price estimate for the bank by modifying to the chart below.

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

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