Lower Bank Profit Margins Seen With Fed’s Help: Chart of the Day

Falling bond yields and the Federal Reserve’s purchases of mortgage-backed securities may lead to more strain on banks’ profitability in the next few quarters, according to David A. George, a Robert W. Baird & Co. analyst.

As the CHART OF THE DAY illustrates, banks’ net interest margins have generally contracted for more than two years. The chart, based on data compiled by the Federal Deposit Insurance Corp., shows the gaps in percentage points between the average interest earned on loans and investments and the average rate paid to depositors.

JPMorgan Chase & Co. (JPM)’s third-quarter results showed the average yield on its securities holdings fell 18 basis points from the second quarter, George wrote yesterday in a report. At Wells Fargo & Co. (WFC), the drop was steeper: 27 basis points. Each basis point equals 0.01 percentage point.

“Unfortunately, this headwind should accelerate” in the fourth quarter, the St. Louis-based analyst wrote. Refinancing rates for home loans have dropped as the Fed begins purchasing $40 billion of mortgage-backed bonds a month. The decline has resulted in faster payoffs on the mortgages underlying the securities, he wrote.

Profits may also suffer as banks shift toward loans from securities and compete more intensely to draw borrowers, George wrote. He added that lenders may retain more of their mortgages, which would reduce fee income from selling the loans.

Net interest margins peaked in 2010’s first quarter and narrowed in eight of the next nine quarters. Margins at banks with more than $10 billion in assets have dwindled more than the average for all federally insured institutions, as the chart shows.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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