Net interest margins at banks that have reported second-quarter earnings are showing the effects of the flattening of the yield curve at the hands of Federal Reserve easing and a flight to safety among investors.
Among the roughly 200 institutions, or 20% of publicly listed banks, that had posted results as of the beginning of the week, two-thirds showed quarter-over-quarter margin declines. The median contraction was 4 basis points, according to data from SNL Financial. Even so, a group of banks managed to buck the trend by employing a variety of levers by: redeeming high-cost trust-preferred securities made possible by
Among the initial wave of companies reporting earnings, the aggregate net interest margin for institutions with assets between $10 billion and $100 billion ticked up 4 basis points to 3.45%. (The median increase for the size category was 1 basis point. Aggregate margins have been calculated as the sum of annualized net interest income for banks in the group divided by the sum of their average interest-earning assets.)
Broadly, the environment was poor for net interest margins in the second quarter. The escalation of the euro-zone crisis sent investors crowding into safe-haven assets and combined with signs of an economic slowdown to push yields lower. Operation Twist, in which the Fed has been swapping from short-term to long-term securities, also lowered rates further out on the curve.
That’s bad for banks that borrow short and lend long, and to the extent that they are forced to replace maturing loans and securities with those generating lower yields. Meanwhile, funding costs have already approached zero. (The yield on 3-month Treasury bills has rarely exceeded 25 basis points since 2008.)
Among banks that beat the odds, the $4 billion-asset Renasant (RNST) managed a 13 basis point increase from the prior quarter and a 22 basis point increase from a year earlier as it notched strong loan growth and rotated out of cash. (The company’s total earning assets have been declining, however, and total net interest income was about even.)
BB&T (BBT) posted a 2 basis point increase from the prior quarter to 3.94%, beating the decline it had previously forecast largely because it redeemed its trust preferred. (The terms of the securities allowed BB&T to call them because the Fed’s Basel proposal would exclude them from Tier 1 capital.) It projected that the margin would hold roughly stable for the rest of the year, with additional help from growth in high-yield loans in niche businesses, like its equipment finance operation, and other factors.
Despite criticism of the Fed’s easy money policies,
