Bank Stock Profit Engine Will Sputter In the New Year

Citigroup analyst Keith Horowitz on Thursday published a report showing "shocked NIMs" for each of the large-banks under his firm's coverage, "simulating the impact if all assets and liabilities reprice at today's current market rates," incorporating "detailed surveys of current loan and securities yields, deposit rates and long-term debt yields." The analyst said that on average, "we find shocked NIMs for the group fall to 2.78% from 3.33% in 3Q12."

Horowitz said that he saw the greatest risk to consensus net interest margin estimates for KeyCorp, U.S. Bancorp (USB) and First Horizon National (FHN), saying that for these three companies "In each case, the consensus forecast for cumulative NIM decline through 2014 points to below average NIM compression risk relative to peers while our 'shocked NIM' analysis points to average or above average risk."

On an "absolute basis," Horowitz estimated that PNC Financial Services Group (PNC), BB&T (BBT) and Wells Fargo will show the sharpest net interest margin declines, "but we believe investors are largely expecting these names to have the most downside."

The analyst also said that JPMorgan's 2014 earnings estimates for large-cap banks "reflect the current forward curve which suggests gradual rising rates. But if we assume the current rate environment remains unchanged, our 2014 estimates would fall on average by ~8%."

Under Horowitz's "shocked" rate scenarios for its big-four competitors, based on third-quarter balance sheets, it estimates that Wells Fargo could see its net interest margin narrow to 2.84%, while JPMorgan Chase's margin could narrow to 2.20% and Bank of America's NIM could dip as low as 2.12%, which is the lowest among the banks covered in his report.

The analyst's "shocked" net interest margin estimate for PNC was 2.82%, while the estimate for BB&T was 3.11%.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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