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Christopher "Kit" Menkin is of editor (, an internet trade publication for the finance/leasing industry. He has 46 years experience in the finance/leasing industry as well as being a founder of a commercial regional bank and serving on several company... More
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  • Banks Net Interest Margin Pain Deepens  0 comments
    May 30, 2013 1:03 PM

    By Kevin Dobbs and Marshall Schraibman

    SNL Financial

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    Net interest margins (NYSE:NIM) contracted during the first quarter of this year at a majority of major banking companies, an SNL Financial analysis found, the result of Federal Reserve policies aimed at keeping rates low.

    With the Fed maintaining its stance, bankers and analysts anticipate continued margin pressure throughout this year, a development that could squeeze bottom lines as the strong loan growth necessary for many to offset NIM headwinds is difficult to come by amid an uneven economic recovery, modest loan demand and fierce competition.

    "It's going to be more and more difficult to offset pressure," analyst Brad Milsaps of Sandler O'Neill & Partners LP told SNL, because most banks have used up much of the wiggle room they have on the funding side and competition is not expected to ease, meaning pricing pressure on loans. "So it will be an even bigger challenge" in coming quarters "as banks will have to grow loans at a greater clip than they have in recent quarters to manage their "Net Interest Margins," and significant loan growth could prove difficult in a still bumpy economy."

    Banks can of course offset NIM pressure via strong loan growth. And cometition is intensifying as major banks pursue this route.

    Fifth Third Bancorp, for one, is banking on it, as it tries to build up certain business lines.

    "The bottom line is that generating earning asset growth is the most effective way and the right way now to stabilize and grow net interest income by offsetting the impact of lower margins," Fifth Third CFO Daniel Poston said while speaking at a conference this month.

    Fifth Third reported average sequential loan growth of 2% in the first quarter, with particular strength in commercial-and-industrial loans.

    "From a balance sheet perspective, we continue to see good growth; commercial and consumer loan growth remains solid, particularly in C&I and in residential mortgages, which were up 16% and 12%, respectively, over the last year," Poston said.

    "The rate environment and economic expectations are impacting competition for better credit deals, particularly in C&I and the auto lending space," he added. "But market disruptions across our footprint have allowed us to attract talent. Talented bankers are now contributing to our growth. We continue to invest in our national lending businesses, particularly in promising industry segments such as health care, and more recently, in the energy sector, which have allowed us to maintain and accelerate our momentum."

    But even for the optimistic, NIM pain is a harsh reality. Fifth Third's margin contracted in the first quarter and Poston conceded pressure is bound to persist.

    The "low interest rate environment is a difficult one for us and for other banks," Poston said, calling NIM compression "somewhat inevitable."

    It is a common concession, analysts say.

    Many banks' net interest margins "will continue to bleed throughout the year," Milsaps said. To be sure, he added, "I don't see anybody having a lot of margin expansion by any stretch."

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    Lower yields on securities, too, are crimping many banks. U.S. Bancorp, whose NIM declined during the first quarter, counts itself as a case in point on this front. "The principal headwind that we have today in the margin is the securities portfolio," U.S. Bancorp CFO Andrew Cecere said while speaking at a conference this month.

    "Every month, I have about $2 billion that pays down or runs off in the securities portfolio," he explained. "We have about a $75 billion securities portfolio. That security that I'm putting on to replace that is coming on at 60 to 70 basis points lower than that which is rolling off. I'm trying to stay short. I'm staying asset-sensitive; I'm not taking extensive duration risk. So that continues to be a principal headwind."

    As SNL reported, testimony before Congress from Fed Chairman Ben Bernanke this month and the latest FOMC minutes suggest that the central bank will continue its latest quantitative easing program, widely known as QE3, in the near term, keeping downward pressure on rates. Bernanke declined to signal when the Fed could commence monetary tightening, saying only that it would make adjustments based on incoming labor and economic data. The FOMC minutes, meanwhile, showed that most committee members want to see "continued progress, more confidence in the outlook or diminished downside risks" before beginning to unwind QE3.

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    U.S. commercial banks reported an aggregate NIM of just under 3.30% in the first quarter - down from the previous quarter and continuing a long-running and rarely interrupted trend that dates to the fourth quarter of 2009, when the aggregate NIM reached 3.71%. (SNL based its analysis on bank regulatory data, which can have different reporting standards than GAAP.)

    As Brett Rabatin, an analyst at Sterne Agee & Leach Inc., put it to SNL in the wake of first-quarter earnings results: "There has been talk at times of rates moving up, but so far they haven't really, and so the margins remain vulnerable. It's a reality for the banks."

    In addition to QE3, previous Fed programs, including its so-called Operation Twist in 2011, have been aimed at flattening the yield curve. The Fed has bought long-term Treasuries and sold shorter-term ones, resulting in tighter spreads between two- and 10-year Treasuries as well as between two- and 30-year Treasuries. This has pressured NIMs.

    "I don't see short rates going up much any time soon," Milsaps said. "I see those rates pretty much anchored. And no bank I follow is assuming higher rates this year or even next."

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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