Banks' Profit Margins Fall -- WSJ
July 23 2016 - 3:03AM
Dow Jones News
By Rachel Louise Ensign
Banks' profit margins on loans are falling again after a brief
boost from the Federal Reserve's rate increase late last year.
Net interest margin, a measure of how much a bank earns from the
difference between what it pays on deposits and what it takes in on
loans and investments, fell at all six of the largest U.S. retail
banks by assets that reported second-quarter earnings this
month.
At those lenders -- J.P. Morgan Chase & Co, Citigroup Inc.,
Bank of America Corp., Wells Fargo & Co., U.S. Bancorp and PNC
Financial Services Group Inc. -- the profitability metric or the
most comparable figure dropped to 2.62% in the second quarter from
2.66% in the first quarter and 2.67% at the end of 2015. The figure
is at or below where it was at all but one of the banks when the
Fed announced its rate increase in the fourth quarter.
The bad news for lenders came after June's Brexit vote in the
U.K. pushed bond yields lower and dimmed expectations for future
Fed increases. Those developments have dashed bankers' hopes that
the Fed's December rate increase would end years of profit pressure
from low rates. Lenders are now in a state of déjà vu.
The metric is a particular focus for midsize Main Street banks
geared toward traditional loans and deposits. "This is really
difficult for banks," Huntington Bancshares Chief Executive Steve
Steinour said of the rate environment. Last year, the bank stopped
working rate rises into its financial projections. "We can't
control it," he said.
Low rates squeeze the profits banks make from borrowing
short-term depositor money and lending it out for longer periods.
Not only has the Federal Reserve not raised short-term rates this
year as previously anticipated, but the yield on the 10-year U.S.
Treasury fell after the Brexit vote. Falling long-term yields mean
banks earn less on loans whose rates are tied to such measures,
such as mortgages. It also means certain securities banks hold will
reprice at lower rates when they mature.
Still, some of the most pressured banks found a way to get by in
the second quarter. Citizens Financial Group Inc. saw its stock
drop by more than 16% in the days following the Brexit vote as
investors sold off shares of banks who are considered particularly
poised to benefit when rates rise.
But on Thursday, the Providence, R.I.-based lender posted
second-quarter earnings that beat analyst expectations and shares
rose 1.7%. The lender was one of a number of banks still able to
grow their overall profits from lending in the second quarter
despite slimmer margins by making more loans.
In a sign of how low rates are pressuring banks, Citizens also
announced new cost-cutting initiatives, following other lenders
like Comerica Inc. and Bank of America Corp.
"You don't quite have that lift" from higher rates, said
Citizens chief executive Bruce Van Saun. "But there are ways to
compensate." Other regional banks such as Fifth Third Bancorp and
KeyCorp are set to update investors with their earnings reports
later this month.
Regional banks' profitability is expected to stay under pressure
if rates remain low. Minneapolis-based U.S. Bancorp chief executive
Richard Davis last year likened his bank's situation waiting for
interest rates to rise to with the last few grueling moments of a
gym-class test, hanging on a pull-up bar for 90 seconds.
Last week, on a call with investors, Mr. Davis extended the
bar-hang analogy further, saying that with rates staying lower for
longer, the bank is now "grimacing like crazy. Both the knuckles
are white. But we're hanging in there."
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
July 23, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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