Fighting the Clampdown on Profits
August 17, 2016 7:30 AM
Net interest margins have only gotten tighter this year. Here is a look at the reasons why, how much some banks are hurting and what certain institutions are doing to relieve the pressure.
Slowdown on Yields
Yields on the benchmark 10-year Treasury have nosedived this year, and banks' loan books are repricing, with lower-yielding assets replacing higher-yielding assets.
Debt Strategies
Banks have been rushing to the capital markets to issue subordinated debt as rates are near historic lows. The debt has allowed many banks to exit the Treasury Department's Small Business Lending Fund program. But the debt is expensive compared with other types of capital, and it has increased borrowing costs and contributed to narrowing margins.
Buying Muni Bonds
Cullen/Frost Bankers in San Antonio is one of several banks that has sought to overcome tight margins by purchasing higher-yielding municipal bonds . Total holdings of muni bonds for all banks in the second quarter rose 8% to $356 billion from a year ago. However, muni bonds are riskier and less liquid than other securities.
Niche Lending
First Horizon National in Memphis, Tenn., has been battling to preserve its profit margins. It has lowered its excess reserves held at the Federal Reserve, which earn rock-bottom rates. First Horizon also bought $637 million of restaurant franchise loans from GE Capital, which should expand margins because the loans carry higher yields than securities or holding cash at the Fed .
Liquidity Pressures
Speaking of liquidity, KeyCorp's net interest margin narrowed a whopping 13 basis points from the first to the second quarter, to 2.77%. The culprit? Regulators forced KeyCorp, led by Chief Executive Beth Mooney, to strengthen liquidity when they approved its purchase of First Niagara Financial Group.
Back in the CRE Pool
Some banks, like Flushing Financial in New York, are re-entering loan markets they had once abandoned. Flushing has started making multifamily loans again, as the commercial real estate category carries higher yields than other loan categories. However, regulators have voiced concerns about an overheating multifamily market.
Fee Antidote
Other institutions have explored ways to boost fee income , to help offset the low spreads from lending income. Community Bank System in DeWitt, N.Y., last quarter increased its fees from insurance, wealth management and employee-benefits outsourcing. The fee emphasis was only a defensive move as its margin narrowed 3 basis points year over year, to 3.73%.
