This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Bank Stock Profit Engine Will Sputter In the New Year

Stocks in this article: BACCJPMWFC

NEW YORK ( TheStreet) -- Banks are likely to face another year of painful contraction of their net interest margins, before seeing a light at the end of the tunnel in 2014.

The net interest margin is the difference between a bank's average yield on loans and securities investments, and its average cost for deposits and wholesale borrowings.

The Federal Reserve has kept its target federal funds rate in a range of zero to 0.25% since late 2008. Last Wednesday, the Federal Reserve Open Market Committee announced that it anticipated "that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

The Fed also said that it would continue to purchase agency mortgage backed securities at a pace of $40 billion a month, and that it would continue buying long-term U.S. Treasury securities "initially" at a pace of $45 billion a month during 2013. This stance will be even more "highly accommodative" than it has been during 2012, because the central bank will stop making concurrent sales of short-term Treasuries.

With the short-term rates being so low for so long, most of the largest banks have already seen the bulk of the savings on the funding side, while their assets continue to reprice to lower rates. Looking at the 24 components of the KBW Bank Index (I:BKX), 13 of the nation's largest banks saw their net interest margins narrow sequentially during the third quarter, while 18 saw them decline year-over-year. Here's how the "big four" U.S. banks' net interest margins fared through the third-quarter:

  • Bank of America (BAC) saw its net interest widen to 2.27% during the third quarter from 2.15% in the second quarter. The third-quarter net interest margin was down slightly from 2.28% in the third quarter of 2011.
  • For Citigroup (C), the third-quarter net interest margin was 2.84%, widening from 2.76% in the second quarter, and from 2.82% a year earlier, making it the only member of the big four club to see its NIM widen sequentially and year-over-year.
  • JPMorgan Chase (Wells Fargo) saw its net interest margin narrow to 2.40% during the third quarter, from 2.42% the previous quarter, and 2.65% a year earlier.
  • Wells Fargo (WFC) had the largest sequential decline in net interest margin during the third quarter among the big four. The NIM was 3.62%, narrowing from 3.83% in the second quarter, and 3.77% in the third quarter of 2011.

Looking past the big four, there were three regional banks among the components of the KBW Bank Index that saw their net interest margins widen sequentially and year-over-year:

  • KeyCorp's (KEY) third-quarter net interest margin was 3.19%, expanding from 2.99% in the second quarter and 3.04% in the third quarter of 2011.
  • First Niagara Financial Group (FNFG) of Buffalo, N.Y., saw its third-quarter net interest margin expand to 3.51% from 3.18% the previous quarter and 3.41% a year earlier, as the company's funding cost declined from its net acquisition of roughly 100 branches from HSBC (HBC).
  • M&T Bank (MTB) -- also headquartered in Buffalo, N.Y. -- saw its NIM expand to 3.75% in the third quarter from 3.68% the previous quarter, and 3.67% a year earlier. The sequential margin improvement "was predominantly due to a $1.6 billion increase in average loans and leases, largely offset by declines in average balances of lower yielding money-market assets and investment securities," according to the bank.

How Low Can Margins Go?


With the Fed continuing to pump money into the economy while boosting demand for U.S. Treasuries to clamp down on long-term rates, JPMorgan analyst Vivek Juneja on Friday said that "banks' ability to offset declining asset yields remains difficult and is exacerbated near term by high mortgage loan refinancing activity and the large amount of deposits invested in liquid assets. With the Fed now expected to hold interest rates flat through mid-2015, we expect NIM pressure to continue throughout 2013 and 2014 for most banks."

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,461.32 -153.49 -0.92%
S&P 500 1,927.11 -14.17 -0.73%
NASDAQ 4,382.8470 -36.6310 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs