Wells Fargo’s Shrinking Net Interest Margins Despite Upbeat Interest Rates Are A Major Concern

Wells Fargo got one step closer to putting its false account-opening scandal to rest recently after it agreed to a $142-million class-action settlement with all affected customers. But the bank’s operations are likely to reel in the after-effects of the scandal for several more quarters – especially because the Fed’s consent order prohibiting the bank from growing any further is likely to stay in place at least until the end of the year. And the impact of this will continue to be felt most prominently on Wells Fargo’s net interest margin (NIM) figure.

The U.S. banking industry has seen net interest margins gradually improve from the all-time lows it reached in early 2015 thanks to the series of rate hikes implemented by the Federal Reserve since December 2015. And while all U.S. banks have seen their net interest margin figures improve steadily, Wells Fargo has reported a decline in this key metric for each quarter since Q2 2017.

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 this 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 NIM 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 the NIM figure 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 (NIM) figure for the U.S. banking industry is now 3.23% – up from the record low of 2.95% in Q1 2015.

The impact of improved interest rates on the largest U.S. banks is evident from the table above, with U.S. Bancorp, JPMorgan and Bank of America reporting a steady improvement in their quarterly NIM figures over the period (Bank of America’s Q1 2017 figure was unusually high because of a one-time interest gain). Among the remaining two banks which reported a decline in NIM figures, the trend for Citigroup can be explained by its geographically diversified business model, which makes its NIM figure less dependent on benchmark interest rates in the U.S.

On the other hand, Wells Fargo’s operations are concentrated almost entirely in the U.S., and the declining NIM figure can be attributed primarily to poor loan growth in the wake of the account opening scandal, and the impact of the Fed’s growth restrictions on day-to-day activities. With the Fed taking a more hawkish view on interest rates for the near- to mid-term, the interest rate environment should continue to improve in the near future. However, Wells Fargo’s NIM figure is likely to remain under pressure in the near future as the banking giant works towards fixing the compliance issues pointed out by the Fed, while it focuses on regaining customer trust. This will continue to weigh on the banking giant’s results over the next few quarters at least.

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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