Banks struggle with net interest margin compression


Net interest margins concerns in the banking industry intensified late last year.

Accommoding monetary policy was pushing rates lower, posing all manner of balance sheet issues. Wells Fargo was one of the banks that was seen as vulnerable. Those fears were borne out by the bank's fourth quarter results, which showed that the bank's now closely watched net interest margin fell more than expected, to 3.56 percent from 3.89 percent a year ago and 3.66 percent in the third quarter.

A five basis point sequential decline would have been good news, but 10 points is just too much. Late last year, the big issues were the imminent run-off of higher-yielding securities and a relative slowdown in write-ups of once-toxic assets.

Right now, the bigger issue for Wells Fargo and the entire industry is the slow growth of lending. Wells Fargo loan-to-deposit ratio stands at about 80 percent, which historically low. The ratio has declined to about 72 percent from 95 percent in 2007 industry-wide. At the same time, the recent mortgage activity gains that powered earnings may dry up just a bit, which would be more bad news for the industry.

It would be nice if the industry found ways to put the flow of deposits to work, but thatt's not going to happen immediately.

For more:
- here's a Barron's article

Related articles:
Wells Fargo faces tougher road ahead
What are banks to do in a low rate environment?

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