All-time lows in net interest margins disrupt US banks
U.S. FDIC-insured banks posted second-quarter net income of $ 70.4 billion, down 8% from the first quarter, but more than double profits from a year ago. Lower loan loss provisions generated a large portion of the quarter’s revenue as credit quality improved. However, loan growth continued to slow, net interest margins fell to historically low levels and overall return on assets fell.
Here’s what drove the 4,951 banks’ performance in the second quarter:
Low interest rates sting. Banks’ average net interest margin contracted 31 basis points from a year ago to 2.5%, the lowest level on record. This resulted in a decrease in net interest income of $ 2.2 billion, or 1.7%. The exception was community banks, which normally have a higher net interest margin (3.25% in the second quarter). Their total net interest income increased $ 1.4 billion (7.2%), in part due to income from paycheck protection program loan repayments and cancellations.
For all banks, however, “the year-over-year reduction in profits from asset returns continued to outpace the decline in average funding costs,” the FDIC said.
Loan growth stagnates. Not only do banks earn less on each loan, the demand for loans is also decreasing in some categories. Total loan and lease balances increased $ 33.2 billion (0.3%) from the first quarter, thanks to credit cards and auto loans. But the total volume of loans declined slightly, led by a 13.4% drop in commercial and industrial loans. According to an August 11 report by Fitch Ratings, “During their earnings calls, many large banks discussed the continued pressure on C&I balances due to lack of [credit] use of the line; However, they have expressed some optimism about demand, especially if supply chain problems ease during the rest of the year. Despite the pandemic, consumers have high levels of liquidity, which means that at some banks, loan repayment levels are historically high.
Growth in deposits continues. Deposit growth has not slowed, so banks are faced with historically low loan-to-deposit ratios. What do they do with excess cash? “Many large banks have significantly built up their hold-to-maturity portfolios, especially as the 10-year US Treasury rate has risen. [in the second quarter]. “For example, Bank of America’s securities portfolio was larger than its loan portfolio in the second quarter, analysts at Fitch said.
Credit quality is maintained. It even improved in the second trimester. Loans 90 days or more past due were down $ 13.2 billion, or nearly 11%, from the first quarter. Net write-offs fell 53.2%, or $ 8.3 billion. The total net imputation rate fell to 0.27%, another record low. The quality of consumer credit, in particular, has exceeded expectations, says Fitch, as payment rates on credit cards have remained high.
Non-interest income remains healthy. Commissions and other non-interest income increased 7% ($ 5 billion) from a year ago due to increased revenue from service fees on deposit accounts and activities trustees. However, non-interest charges remained high, increasing 3% ($ 3.7 billion).
The earnings outlook for the coming quarters is uncertain. Fitch sums up: “As long as credit demand remains weak in the wholesale and consumer asset classes and interest rates remain extremely low, the [first quarter 2021] earnings performance is likely to be the peak for the foreseeable future. “