Fitch: NIM Compression Common Concern in U.S. Banks' 4Q Results

  Fitch: NIM Compression Common Concern in U.S. Banks' 4Q Results

Business Wire

CHICAGO -- January 16, 2013

The largest U.S. commercial banks continued to report narrower net interest
margins (NIM) in the fourth quarter, as the absence of attractive reinvestment
yields and somewhat faster deposit growth compressed historically weak margins
further. Absent a steepening of the yield curve in 2013, Fitch expects margin
compression to continue in future quarters, as banks exhaust opportunities to
reprice loans, while higher-yielding securities run off.

Among large U.S. banks that have reported 4Q earnings so far, we estimate that
average year-over-year compression stands at approximately 15bps, with
sequential margin declines continuing for most commercial banks in the
quarter. The biggest declines have been reported by Wells Fargo (WFC), at
33bps year over year, and JP Morgan Chase (JPM), whose reported NIM was 30bps
lower in 4Q12 than a year earlier. In contrast, US Bank (USB) turned in a
relatively stable NIM performance (5bps down year over year).

If deposits continue to grow faster than loans in coming quarters, we expect
the resulting increase in cash and short-term investments (relative to higher
yielding loans) to dilute interest margins further.

Strong deposit inflows continued to exert pressure on WFC's NIM by 10bps
sequentially in the fourth quarter, following a particularly steep drop of
25bps in the preceding quarter. Excess liquidity was the largest contributor
to NIM compression, as deposit growth of $51 billion last quarter surpassed
modest period-end loan growth. WFC's 3.56% NIM for 4Q was the lowest margin
reported by the bank in its recent history.

JPM noted on its earnings call that it expects to face a continuation of
modest NIM pressure in future quarters. Drivers of the 7bp sequential core
margin decline, the bank indicated, included a lower rate environment in
Europe, which cut into investment yields. Like WFC, JPM noted that NIM
compression did not drive a decline in net interest income, since the cost of
deposits fell in the quarter due to the ongoing low deposit rate environment.

Among large regional banks, Comerica reported a 9bp NIM decline quarter over
quarter. This was driven by a shift in its loan mix toward lower yielding
commercial loans and a drop in mortgage-backed securities yields. Separately,
M&T reported a 3bp decline in NIM during the fourth quarter. M&T actually
increased its NIM by 14bps year over year.

Absent significant cost cutting, ongoing NIM compression is likely to lead to
earnings declines for some banks in 2013. As mortgage refinancing activity
slows down, many commercial banks will find it difficult to offset shrinking
NIMs via increases in non-interest income. In addition, loss provisions are
likely to increase for many banks this year, further eroding net income.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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