25 April 2024

Regional Banks Sweat Through Low-Rate ‘Torture’

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Commercial banks are still struggling with the low interest rates that have been hammering their profitability for several years. And unlike their Wall Street rivals, many regional and community lenders can’t count on the strong deal and trading activity that has boosted first-quarter earnings at the likes of Goldman Sachs Group Inc. and Morgan Stanley.

The low rates, which have stuck around longer than many expected, hurt bread-and-butter lenders who gather deposits and make loans. The reason: Such banks, although flush with deposits, can’t earn a high enough rate on loans to boost their profit margins. There appears to be little relief in sight: In the futures market, bets that the Federal Reserve will keep short-term rates close to zero have been increasing in recent weeks amid choppy economic data and lackluster corporate earnings growth.

On Tuesday, Birmingham, Ala.-based Regions Financial Corp. became the latest bank to report strains in the first quarter from persistently low interest rates. The average yield on its loan portfolio fell to 3.45% from 4.03% a year ago. Overall loans increased, but at a slower pace than their growth in deposits. The issue that has befallen regional banks but that has had little effect on Wall Street giants is an influx of customer deposits and a dearth of profitable places to put them. That has put continued pressure on one of the most closely watching measures of lenders’ profitability: net interest margin.

A bank’s NIM takes into account how much the lender earns from putting deposits into loans or securities. On average, U.S. banks with more than $10 billion in assets had a net interest margin of 2.97% in the fourth quarter of 2014, the lowest level in nearly 25 years, according to the Federal Deposit Insurance Corp.

Six of nine big commercial banks that have reported earnings so far this period, including Wells Fargo & Co. and PNC Financial Services Group Inc., logged first-quarter margins below their fourth-quarter level. It was a different story at Goldman, Morgan Stanley and J.P. Morgan Chase & Co., all of which in recent days reported profits above analysts’ expectations. Following Goldman’s and Morgan Stanley’s earnings releases, bank analysts at Nomura Holdings Inc. revised their estimates 2015 earnings at each company about 8% higher.

Regardless of size, investors are staying away from some banks that are viewed as sensitive to interest rates. Bank of America Corp. and Regions, two banks with a lot to gain from higher rates due to the nature of their loan portfolios, are the worst performers this year in the KBW index of bank stocks. Their shares are down 13.4% and 9.3% respectively.

Some banks, including Regions, are even looking at emulating their Wall Street peers by bulking up their wealth-management and capital-markets divisions. Wealth-management divisions collect fees and commissions for advising wealthy individuals, while capital-markets divisions help companies sell stocks and bonds to big institutional investors.

Click here to access the full article on The Wall Street Journal. 

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