Fitch: NIM Compression Common Concern in U.S. Banks' 4Q Results
The largest U.S. commercial banks continued to report narrower net interest margins (NIM) in the fourth quarter, as the absence of attractive reinvestment yields and somewhat faster deposit growth compressed historically weak margins further. Absent a steepening of the yield curve in 2013, Fitch expects margin compression to continue in future quarters, as banks exhaust opportunities to reprice loans, while higher-yielding securities run off.
Among large U.S. banks that have reported 4Q earnings so far, we estimate that average year-over-year compression stands at approximately 15bps, with sequential margin declines continuing for most commercial banks in the quarter. The biggest declines have been reported by Wells Fargo (WFC), at 33bps year over year, and JP Morgan Chase (JPM), whose reported NIM was 30bps lower in 4Q12 than a year earlier. In contrast, US Bank (USB) turned in a relatively stable NIM performance (5bps down year over year).
If deposits continue to grow faster than loans in coming quarters, we expect the resulting increase in cash and short-term investments (relative to higher yielding loans) to dilute interest margins further.
Strong deposit inflows continued to exert pressure on WFC's NIM by 10bps sequentially in the fourth quarter, following a particularly steep drop of 25bps in the preceding quarter. Excess liquidity was the largest contributor to NIM compression, as deposit growth of $51 billion last quarter surpassed modest period-end loan growth. WFC's 3.56% NIM for 4Q was the lowest margin reported by the bank in its recent history.
JPM noted on its earnings call that it expects to face a continuation of modest NIM pressure in future quarters. Drivers of the 7bp sequential core margin decline, the bank indicated, included a lower rate environment in Europe, which cut into investment yields. Like WFC, JPM noted that NIM compression did not drive a decline in net interest income, since the cost of deposits fell in the quarter due to the ongoing low deposit rate environment.
Among large regional banks, Comerica reported a 9bp NIM decline quarter over quarter. This was driven by a shift in its loan mix toward lower yielding commercial loans and a drop in mortgage-backed securities yields. Separately, M&T reported a 3bp decline in NIM during the fourth quarter. M&T actually increased its NIM by 14bps year over year.
Absent significant cost cutting, ongoing NIM compression is likely to lead to earnings declines for some banks in 2013. As mortgage refinancing activity slows down, many commercial banks will find it difficult to offset shrinking NIMs via increases in non-interest income. In addition, loss provisions are likely to increase for many banks this year, further eroding net income.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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