NEW YORK (
) -- The
latest move to push long-term rates lower will add fuel to the fire for some banks with assets repricing faster than liabilities, but there are other banks that have already felt the worst effects of margin compression, and Ben Bernanke's latest move also contains a silver lining for the industry.
The Federal Reserve Open Market Committee on Thursday announced that the central bank would purchase "additional agency mortgage-backed securities at a pace of $40 billion per month," bringing its total mortgage-backed securities purchases to a pace of roughly $85 billion per month. The Fed also said that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." The target federal funds rate is currently at a range 0 to 0.25%.
Since the Fed's target federal funds rate has been in a range of between 0% and 0.25% since December 2008, most banks have already enjoyed most of the benefit of a decline in their funding cost, and since long-term rates have continued to decline, the industry is seeing its rate spreads continue to narrow.
The Federal Deposit Insurance Corp. reported that during the second quarter, the aggregate net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- for the nation's banks and savings and loan associations narrowed to 3.46% during the second quarter, from 3.52% the previous quarter, and 3.61% a year earlier.
According to Guggenheim Securities analyst Marty Mosby, among the largest U.S. bank holding companies, "
(WFC - Get Report)
has the most margin compression today expected over the next year," as the company has a large percentage of assets with original maturities of greater than three years, that are "repricing down now, lower than they were three years ago."
Speaking at the Barclays Capital Global Financial Services Conference last Tuesday, Wells Fargo CFO Tim Sloan said that although the company achieved a "stable" net interest margin during the second quarter, in part because of "a 7 basis point linked quarter benefit from higher variable items," the margin for the third quarter "could be similar to what we experienced in the third quarter of last year when our net interest margin was down 17 basis points."
During the second quarter, Wells Fargo's net interest margin, or NIM, was a relatively high 3.91%, unchanged from the first quarter, but declining from 4.01% in the second quarter of 2011. Mosby expects the company's margin to contract by a further 21 basis points from the second quarter, through the fourth quarter of 2013.
Wells Fargo posted good second-quarter results, as strong mortgage loan demand fed earnings applicable to common stock of $4.4 billion, or 82 cents a share, increasing from $4.0 billion, or 75 cents a share, the previous quarter, and $3.7 billion, or 70 cents a share, a year earlier.