Banks' Profit Margins Fall -- WSJ

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 [e-mail]

(END) Dow Jones Newswires

July 23, 2016 02:48 ET (06:48 GMT)

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