Boring but critical net interest margins — the difference between what a bank pays on deposits and what it charges on loans — have been under pressure for years because of historically low interest rates. There just isn’t as much room to make money when 30-year mortgages are going for a national average of just 3.6%.
But as the results from the banks’ most recent quarters show, those net interest margins are getting squeezed at an accelerating rate.
How can that be when the Federal Reserve and the bond market have been suffocating rates for more than five years now?
As time marches on, borrowers have been paying down their older, higher-interest loans. As a result, banks’ total loan portfolios are throwing off less interest — and banks can’t do much to reverse the trend until rates rise.
Wells Fargo, for example, said its first-quarter net interest margin dropped to 3.48% from 3.91% in the year-ago period. Sequentially, net interest margin fell from 3.56% in the fourth quarter of last year and 3.66% in the third quarter.
JPM, meanwhile, said another drop in net interest margin caused net interest income to decline 2%.
With the market and the Fed signaling low rates for the foreseeable future, net interest margin — that bread-and-butter of boring old banking — is going to remain a drag on the sector’s bottom line.
The focus on disappointing net interest margins helps explain why shares in both banks sold off on the earnings news, even though both reported earnings per share that easily topped Wall Street expectations.
But, strange as it might seem, the selloff is actually kind of good news for what it reveals about the market’s attitude toward banks. If anything, we probably should be pleased to see the Street sweating such metrics.
Hey, after years of existential bank crises, we’re finally getting back to fretting about banks in a business-as-usual way. It’s almost refreshing.
After all, it’s not like concern over net interest margins is new. It’s just that ever since the financial crisis, investors have been more concerned over the health of banks’ balance sheets, their loan losses, the dearth of deal activity, the sluggish capital markets, crazy-stupid trading losses, their ability to buy back shares and pay dividends … the list goes on.
But bank balance sheets have been on the mend for years now. Both Wells Fargo and JPM said loan losses once again declined year-over-year. It’s old news, and that helps put the core business of banking — lending money at interest — in the spotlight.
Now, it’s not good news that both JPM and Wells Fargo saw tepid loan growth in the first quarter — loans that are less profitable because of falling net interest margins. JPMorgan CEO Jamie Dimon said in a statement that loan growth was soft across the entire industry in the first quarter. That sure didn’t help the bank’s consumer banking business, which reported a 12% drop in profit, excluding accounting adjustments.
And Wells Fargo, the nation’s biggest home lender, reported a second consecutive quarter of declining mortgage and refinancing activity. Fees from mortgages fell 2% in the first quarter after dropping 9% at the end of last year.
The slowdown wasn’t entirely unexpected. The rush to refinance mortgages at near-record low rates is naturally running its course.
Rather, what’s interesting is the market’s renewed focus on such basic bank measures. After everything we’ve been through, drilling down into the fundamentals of loan growth and interest margins almost seems quaint.
JPM and WFC might have disappointed the Street with those figures, but it’s almost perversely good news that they matter so much again. After years of too much bank drama, it’s almost a boring and blessed relief.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.