This "suggests that the benefit from raising long-term rates is not nearly as significant to the banks as an increase in the short end of the curve or a parallel shift in the curve would be," Mutascio wrote in a note to clients Thursday. "We will have to wait for an increase in the short-end of the curve to see broad NIM expansion."
The FOMC has repeatedly stressed that it was unlikely to raise the federal funds rate, at least until the U.S. unemployment fell below 6.5%, barring a significant increase in inflation. The June unemployment rate was 7.6%.
Mutascio added that the continued NIM compression for banks "also implies that the benefit of higher long-term rates on the banks' investment securities portfolio takes a long time to actually play out," and that "there are numerous moving parts to the NIM that aren't fully captured by a static asset-sensitivity analysis."
Mutascio rates Regions "market perform," and on Wednesday raised his price target for the shares to $11 from $8.50, after the lender announced its second-quarter results.Regions reported earnings available to common shareholders of $259 million, or 18 cents a share, declining from $327 million, or 23 cents a share, during the first quarter, and $284 million, or 20 cents a share, during the second quarter of 2012. The second-quarter results included "$56 million in costs associated with the early termination of certain debt and preferred securities," the company said. Mutascio raised his 2014 EPS estimate for Regions to 91 cents from 88 cents, but wrote in a note on Wednesday that "The NIM expansion is coming at the expense of balance sheet growth as the company significantly lowered the level of its investment securities portfolio in 2Q13 (end of period securities declined 10%, or $2.7 billion). This contraction resets the company's average earning asset bar and significantly offsets the NIM expansion." The analyst added that the higher price target for Regions "assumes the shares trade up to 12.0x our revised 2014 EPS estimate, which represents the high end of the historical range for our large cap bank coverage." V data by YCharts
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