A Sterne Agee report notes low interest rates squeezing bank margins

Profit margins for traditional banking operations have been tight for some time, and it doesn’t look to be getting much better any time soon. According to a January 26th Industry Report from equity research firm Sterne Agee, large banks (including super-regional banks) are likely to be under pressure from small net interest margins (NIM) for at least the next few quarters.

Sterne Agee analysts Terry McEvoy and Austin Nicholas note that 60% of revenue for super-regional banks came from net interest income in 2014 (for the large universal banks it was 47%). Related to this, they note large banks are facing pressure trying to maintain NIM: “Recent curve flattening, declining loan yields, and hints in the marketplace of deposit rates drifting higher have raised legitimate concerns on additional NIM compression in 2015 or until the Federal Reserve raises rates.”

Large Banks

NIM down for large banks in fourth quarter

Declining loan yields and larger securities portfolios relative to earning assets led to the decrease in bank margins in 2014. The super-regional banks reported a two basis point compression in the net interest margins in the fourth quarter of 2014 relative to the prior quarter. This compares with the 9 bps and 6 bps Q/Q compression in the second and third quarters of 2014, respectively.

McEvoy and Nicholas note: “Favorable NIM performance was seen at Zions Bancorporation (up 5bps), Citizens Financial Group (up 3bps), Regions Financial (down 1 bps), and Huntington Bancshares, U.S. Bancorp, Wells Fargo, and KeyCorp (down 2bps).”

Increase in size of very-low interest securities portfolios

Getting ready for new liquidity requirements that take effect in January 2016, the super-regional banks have increase the size of their securities portfolios or HQLA (high quality liquid assets). Securities portfolio and cash have moved up to 26% of average earnings assets for the sector. Keep in mind that although yields on securities decreased just one basis point quarter over quarter, they are still nearly 130 basis points below that of loans. Of note, the SA analysts anticipate significantly slower growth in HQLA in 2015..

Loan yields also lower in fourth quarter

McEvoy and Nicholas also highlight that loan yields in the sector compressed by two basis points in the fourth quarter, with BB&T Corporation and PNC Financial Services the outliers because of lower levels of purchase accounting accretion. HBAN was next on the list (7 bps of Q/Q compression), which the Sa analysts attribute to competitive pricing in the auto sector and lower yields in its C&I portfolio.