Last year closed out four straight years of margin compression due to the painfully prolonged interest rate environment and stiff competition for loans, according to a recent analysis from SNL Financial.
Those two factors have forced banks to rely more heavily on their securities portfolios for income. Rate increases have not materialized as many hoped, long-term rates have fallen even further, most higher-yielding assets originated or purchased when rates were higher have run off banks’ books and funding costs have essentially stabilized at low levels, leaving bank margins few places to go but down in the fourth quarter.
SNL Financial cited Drexel Hamilton analyst David Bishop as saying in a Feb. 9 report, "Once again net interest margins were under pressure within our coverage group as the extended low-rate environment and the direction of the 10-year Treasury continues to hamper reinvestment rates on the asset side.”
Among the top 50 banks by assets, 72 percent reported linked-quarter margin compression and 80 percent of the institutions reported that margins contracted from the year-ago period, according to SNL data.
Much of the margin compression in recent years has come as banks have faced pressure on earning asset yields and have failed to deploy excess liquidity by making loans. The Federal Reserve’s January senior loan officer survey indicated that loan demand was largely unchanged in the fourth quarter and loan spreads remain under pressure due to competition, but there are signs that the commercial and industrial loan spreads stabilized somewhat, SNL said, citing Evercore analyst John Pancari.
"While C&I loan spreads remain pressured given competition, pricing appears to have stabilized somewhat as the number of banks that reported reduced loan spreads (over cost of funds) declined LQ," Pancari wrote in a Feb. 2 report.
According to SNL Financial, bank executives said during fourth-quarter earnings season that the competition for loans remained intense. Fifth Third Bancorp CEO Kevin Kabat noted on his company’s fourth-quarter earnings call that competition in terms of pricing and structure on loans increased across many loan categories as 2014 progressed. He said that the largest institutions seem to be the most aggressive when it comes to competing with the structure on credits. The executive also noted that the competition is not surprising, but it has occurred faster than expected.
"I guess the biggest surprise is the speed at which it has accelerated and that is really kind of the discipline that we put against our orientation from that perspective. So we saw okay production, we saw a lot more aggressive pay down as we got progressively into the year. And I think that will continue," Kabat said on the call, according to the transcript.
