Banks might shift asset allocation in face of NIM compression
If the Wells Fargo earnings report earlier this week did anything, it riveted attention on net interest margins (NIMs).
NIMs have been percolating along as an issue. But the Federal Reserve's QE3 has given the issue new urgency.
So what to expect? Most assume that margins will be under pressure at JPMorgan Chase, Bank of America and Citigroup.
The Financial Times reports that, "The average of analysts' estimates for the four biggest banks' net interest margin is 2.8 per cent, down from about 4 per cent 10 years ago. Longer-term industry data from the Federal Deposit Insurance Corporation shows the current low level was last reached more than 50 years ago."
One huge issue is what banks should do in the face of such compression. Many will be tempted to change the composition of their assets. The reality is that they are desperate for yield right now. As they face the accelerating expiration of higher yielding securities, they will have little choice but to embrace riskier fare, including higher-yielding corporate bonds and asset-backed securities of all stripes.
Of course, banks could also boost their loans significantly, and find ways to charge higher rates. As of now, that seems less likely than a shift in the investment portfolio.
- here's the FT article on NIMs
Banks struggle with net interest margin compression