Commercial banks are still struggling with the low interest
rates that have been hammering their profitability for several years. And
unlike their Wall Street rivals, many regional and community lenders can’t
count on the strong deal and trading activity that has boosted first-quarter
earnings at the likes of Goldman Sachs
Group Inc. and Morgan Stanley.
The low rates, which have stuck around longer than many
expected, hurt bread-and-butter lenders who gather deposits and make loans. The
reason: Such banks, although flush with deposits, can’t earn a high enough rate
on loans to boost their profit margins. There appears to be little relief in
sight: In the futures market, bets that the Federal Reserve will keep
short-term rates close to zero have been increasing in recent weeks amid choppy
economic data and lackluster corporate earnings growth.
On Tuesday, Birmingham, Ala.-based Regions
Financial Corp. became the latest bank to report strains in the first
quarter from persistently low interest rates. The average yield on its
loan portfolio fell to 3.45% from 4.03% a year ago. Overall loans increased,
but at a slower pace than their growth in deposits. The issue that has befallen
regional banks but that has had little effect on Wall Street giants is an
influx of customer deposits and a dearth of profitable places to put them. That
has put continued pressure on one of the most closely watching measures of
lenders’ profitability: net interest margin.
A bank’s NIM takes into account how much the lender earns
from putting deposits into loans or securities. On average, U.S. banks with
more than $10 billion in assets had a net interest margin of 2.97% in the
fourth quarter of 2014, the lowest level in nearly 25 years, according to the
Federal Deposit Insurance Corp.
Six of nine big commercial banks that have reported earnings
so far this period, including Wells Fargo & Co. and PNC Financial
Services Group Inc., logged first-quarter margins below their
fourth-quarter level. It was a different story at Goldman, Morgan Stanley
and J.P. Morgan Chase & Co., all of which in recent days reported
profits above analysts’ expectations. Following Goldman’s and Morgan Stanley’s
earnings releases, bank analysts at Nomura Holdings Inc. revised
their estimates 2015 earnings at each company about 8% higher.
Regardless of size, investors are staying away from some
banks that are viewed as sensitive to interest rates. Bank of
America Corp. and Regions, two banks with a lot to gain from higher
rates due to the nature of their loan portfolios, are the worst performers this
year in the KBW index of bank stocks. Their shares are down 13.4% and 9.3%
respectively.
Some banks, including Regions, are even looking at emulating
their Wall Street peers by bulking up their wealth-management and
capital-markets divisions. Wealth-management divisions collect fees and
commissions for advising wealthy individuals, while capital-markets divisions
help companies sell stocks and bonds to big institutional investors.
Click here to access the full
article on The Wall Street Journal.