SNL: NIMs Contracted in Q2, But Banks’ Woes Could Ease
SNL Financial reported that banks are not out of the woods yet when it comes to pressure on their net interest margins. But the rate environment appears to be evolving in lenders’ favor, bankers and analysts say.
According to SNL, U.S. commercial banks reported an aggregate NIM of 3.25% in the second quarter, down from 3.27% the previous quarter, and margins narrowed at a majority of 20 major banking companies.
The results extended a discouraging trend, from lenders’ view, that dates to the first quarter of 2010, when the aggregate NIM was 3.69%. SNL noted that its analysis is based on bank regulatory data, which can have different reporting standards than GAAP.
Margin headwinds have battered the industry over the past few years amid Federal Reserve policies that have put downward pressure on interest rates, including quantitative easing programs that involve massive bond purchases.
But Fed chairman Ben Bernanke said during the second quarter that the central bank could begin to taper its bond-buying effort, widely known as QE3, later this year if economic conditions continue to improve.
That spurred a hike in 10-year Treasury yields during the second quarter and led to a jump in long-term interest rates, signaling a shift in the rate environment, providing banks an avenue to boost securities yields and lifting hopes that rising short-term rates — the key for many banks to see notable NIM improvement — may finally be on the horizon.
“I think the rate move that we saw was certainly nice and the industry certainly needed it,” SunTrust Banks CFO Aleem Gillani told analysts during earnings season. “So thank you, Mr. Bernanke.”
Over time, as banks reinvest at higher long-term rates, their securities portfolios gradually benefit, helping to offset low levels on the short end of the yield curve. “All told, as we look toward the coming quarters and assuming current (long) rates hold, we expect the steeper yield curve to help mitigate the declining trend in net interest margin, as well as to provide an increasing benefit to net interest income over time,” said Gillani, whose bank saw its NIM decline in the second quarter.
But boosts from securities take time to materialize. That helps explain why SunTrust and others anticipate modest NIM contraction during the third quarter before finally stabilizing later this year.
“With respect to our NIM outlook, specifically for the back half of this year, we anticipate a mid-single digit basis point decline in the third quarter, followed by a more stable margin in Q4,” Gillani said.
To fully emerge from margin woe, however, lenders need the economy to improve significantly enough to convince the Fed to ease downward pressure on short-term rates, bankers and analysts say. That would allow banks to bring on more loans at higher rates, juicing their interest income.
“What the industry really needs is a move up in short-term rates to take us back to the profitability levels that we enjoyed before the crisis,” Gillani said. “And when you think about where the industry’s net exposure is along the curve, it’s generally much shorter as an industry than 10 years ago. So this (the rise in long-term rates) is going to help somewhat.” But “it’s not going to be what we need to take us back to much higher net interest margin levels.”
To be sure, significant loan growth would also help to counter NIM troubles. But such growth has been hard to come by amid the still slow-growth economy, and competition for prized customers has proven fierce, bankers say, hurting lenders’ ability to attract good credits at favorable prices. Stronger pricing would boost loan yields and help margins.
To view the SNL Financial article & exhibits click here.