Rates Pressure Net Interest Margins Across Industry: Interactive Graphic

Viewpoint Financial’s (VPFG) margin strengthened as it continued to build its loan book while Westamerica’s (WABC) crumpled as it cited vicious underwriting competition that led it to stockpile short-term securities.

While there were winners and losers, however, net interest margin pressure was felt broadly in the third quarter. (Use the dropdown in the graphic below to see margin data for a group of large banks and companies that posted big year-over-year swings. Use the check boxes to compare them with interest rate and industrywide trends. Select the other tabs for industrywide overviews.)

Overall, about two-thirds of the roughly 650 publicly listed banks considered here reported quarter-over-quarter declines in their net interest margins. About two-thirds also reported year-over-year declines.

The median net interest margin for the group ticked down 1 basis point from the second quarter and 12 basis points from the year prior to 3.68% during the three months that ended in September.

The yield curve, as measured by the difference between the rate on 10 year Treasuries and 2 year Treasuries, has continued to compress, and yields on earning assets fell faster than the cost of funding them. The median yield decreased 12 basis points from the second quarter to 4.34% while the median cost of funds fell 8 basis points to 0.65%.

The yield curve is a factor in bank margins to the extent that they borrow short and lend long, though it is risky for banks to make unbalanced bets on interest rates. Also, other factors, like the maturity profile of the assets and liabilities on bank books and the speed at which rates change, can be more important.

Westamerica’s margin fell 19 basis points from the second quarter and 66 basis points from the year prior to 4.68% in the third quarter as the yield on the company’s assets fell 20 basis points from the second quarter and 73 basis points from the year prior. Meanwhile, its funding costs seem to be scraping along a bottom at 13 basis points in the third quarter, the same level as in the second quarter.

The $4.9 billion-asset, San Rafael, Calif., company attributed the decline in its net interest income to lower yields on loans and bonds. As it has in previous reports, it also said it pulled back on lending because competition has made pricing unattractive as looser underwriting standards have increased credit risk.

The tradeoff between loan growth and yield has been apparent at some banks. Still, the largest swings in margins are frequently associated with acquisitions that can endow a buyer with high-yielding loans or load it with idle cash, and the peculiarities of accounting for purchases of distressed assets.

The median net interest margin for the group examined for this article is roughly on par with levels posted in 2007, when the yield curve was shallower.

On an aggregate basis – that is, the sum of net interest income earned across the industry as a percentage of total interest-earning assets – margins showed a sharper increase as the yield curve steepened, and then a sharper descent beginning in 2010. (The aggregate data used here includes banks whose shares are not listed on public exchanges.)

The kink likely reflects the onboarding of hundreds of billions of dollars of high-yielding credit card loans under new accounting rules, and their subsequent runoff. Like the medians, the aggregate margins are now about on par with levels during the middle of the last decade.