Q4 2014 U.S. Banking Review: Net Interest Margin

As a result of the prevailing low interest rate environment, shrinking net interest margin (NIM) figures have put pressure on revenues across the banking sector since early 2011. The banks have had to put in a lot of effort to boost revenues from fee-based services and cut costs to offset this impact. Among the country's largest commercial banks, Wells Fargo ( WFC ) and U.S. Bancorp ( USB ) have been hit the most due to their traditional loans-and-deposits business models compared to their larger competitors JPMorgan Chase ( JPM ), Bank of America ( BAC ) and Citigroup ( C ), which rely on a range of diversified financial services to generate revenues. In this article, we detail how these banks' NIM figures have changed over recent quarters and what to expect in the coming quarters.

See our full analysis for Bank of America | Citigroup | JPMorgan | Wells Fargo | U.S. Bancorp

The Federal Reserve set its benchmark interest rates between 0% to 0.25% in December 2008, and has maintained them at that level since. While that helped jump-start lending and borrowing, it has also made it difficult for investors to find investment options that yield high returns. This has affected banks' interest margins. The table below shows the NIM figures for the five largest banks for the last five quarters as well as for the last three years. The figures were reported by the banks in their respective quarterly SEC filings. The weighted average figure is arrived at by weighing each bank's interest margin for the quarter with the average interest-earning assets it reported for the period.

Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 FY 2012 FY 2013 FY 2014
U.S. Bancorp 3.40% 3.35% 3.27% 3.16% 3.14% 3.58% 3.44% 3.23%
Wells Fargo 3.26% 3.20% 3.15% 3.06% 3.14% 3.76% 3.39% 3.11%
Citigroup 2.88% 2.90% 2.87% 2.91% 2.92% 2.88% 2.85% 2.90%
Bank of America 2.44% 2.29% 2.22% 2.29% 2.18% 2.34% 2.37% 2.25%
JPMorgan 2.20% 2.20% 2.19% 2.19% 2.14% 2.48% 2.23% 2.18%
Weighted Avg. 2.67% 2.63% 2.59% 2.60% 2.55% 2.81% 2.68% 2.50%

As is evident from the table, NIM figures for all the banks have fallen considerably from the highs in 2011. In fact, the interest margins have seen an uptick in only 2 quarters over the 2012-2014 period - in Q4 2013 and in Q3 2014. Another important thing to note is the actual decrease in NIM figures for each of the banks. Wells Fargo has borne the brunt of low interest rates the most, with its interest margin shrinking 101 basis points (1.01 percentage point) over the Q1 2011 - Q4 2014 period. JPMorgan has also seen a marked 75 basis point (0.75%) reduction in NIM for this period. In contrast, Citigroup has maintained its NIM figure almost constant at 2.9% over the years. This is because the geographically diversified banking giant is able to raise cheap funds outside the U.S., and its overall NIM figure is also less sensitive to the U.S. interest-rate environment.

The chart below makes it easier to compare the relative changes in NIM figures for these five banks over the last four years.

With the Fed discontinuing its asset purchase program in October, it has hinted at a possible increase in federal fund rates over the coming months. The should allow the net interest margin figures at banks to reverse this declining trend in the near future. But in the meantime, the NIM figures are likely to move erratically - especially for banks which rely more heavily on loans and deposits - as the low benchmark rates will continue to fuel faster growth in deposits than loans. This trend is good news for the banking sector, and we expect all commercial banks to report higher interest margins by the end of the year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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