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Bank Stocks and the Secret of NIM (Update 2)

Stocks in this article: BAC JPM WFC RF FMER

While the company's average total loans declined 1% sequentially to $74.622 billion in the fourth quarter as commercial real estate and residential mortgage loans continued to decline, average commercial and industrial loans grew 1% to $26.414 billion. The company also reported that its average auto loans grew by 7% sequentially and 26% year-over-year, to $2.295 billion in the fourth quarter.

FBR analyst Paul Miller on Wednesday said "we forecast Regions' NIM to remain relatively stable compared to other large peers through 2013 given potential offsets which will help minimize the impact of asset yield declines and net loan runoff." Underlining the need to look at net interest dollars rather than just focusing on net interest margin, Miller said that "even assuming flat margins, we expect that Regions will have a difficult time holding net interest income levels flat in light of its declining total loan balances."

Miller rates Regions "Market Perform," with a $7 price target.

First Merit's shares declined 2% on Wednesday to close at $15.18.

With "27 of the top 100 regional banks" having reported their earnings through Friday, McEvoy said in a note on Monday that "the ability of banks to increase net interest income in '13 will rest on whether loan growth can offset net interest margin compression."

In his fourth-quarter review for large-cap banks, Credit Suisse Moshe Orenbuch on Tuesday said that "there was differentiation between those banks that were able to stabilize the NIM despite low rates and those were more susceptible to NIM pressure including WFC."

Defending NIM Beautifully

A look at sequential changes in net interest margin and net interest income underlines Rodis's view that net interest income is holding up nicely for many banks, despite the prolonged hostile rate environment. Wells Fargo (WFC) reported that its tax-adjusted fourth-quarter net interest margin was 3.56%, narrowing by 10 basis points from the third quarter. Meanwhile, the company's net interest income declined to $10.643 billion in the fourth quarter from $10.662 billion the previous quarter. On a percentage basis Wells Fargo's net interest margin was down by 2.7%, while the company's net interest income was down by just 0.2%.

The company said that "the primary driver of the decline, approximately 8 basis points, was strong deposit growth of $30 billion in the quarter," with the incoming money invested in short-term securities, so that the new deposits "were essentially neutral to net interest income."

Wells Fargo said that during the fourth quarter, loan-portfolio income "rose slightly from prior quarter, reflecting both organic growth in consumer and commercial loans and the retention of $9.7 billion in high-quality, conforming first real estate mortgages in the fourth quarter." That would indicate that the company didn't sell as much newly originated mortgage product to Fannie Mae (FNMA) and Freddie Mac (FMCC) as it could have.

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