Big Banks Pressured by Low NIMs, But Not All Are Equal

Big banks including Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), Morgan Stanley (NYSE:MS), and Goldman Sachs Group, Inc. (NYSE:GS) all surprised to the upside for first quarter 2013 earnings reports. Revenue sources are more diversified in Wells Fargo and Citigroup. JP Morgan, and Goldman Sachs benefited from strong investment banking and trading revenues in the quarter. Morgan Stanley benefited from a tax benefit (~$0.07) and strength in wealth management revenues. In contrast, Bank of America’s earnings came in below Wall Street’s expectations due to seasonal higher compensation incentives that increased costs in the quarter.

Big Banks Pressured by Low NIMs, But Not All Are Equal

The big banks above also reported thin net interest margins (NIMs) for the quarter. Will NIMs expand for the rest of 2013? Banks are competing to get more depositors while borrowers continue to benefit from the low rate environment. Out of the banks listed below, Wells Fargo has maintained lower deposit expense getting a higher margin relative to peers. However, its NIM has declined 0.80 percent relative to fourth quarter 2012.

Bank Chart

Both JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC) have bolstered their profitability having increased mortgage fees. For Wells Fargo, mortgage fees comprised 13% of revenue. Citigroup Inc. (NYSE:C) has also benefited from profitable mortgages, but to a lesser extent. Bank of America Corp (NYSE:BAC) has benefited from increased mortgage originations and lower non performing loans. However, the mortgage margins have compressed at all 4 originators.

Given upcoming tighter regulations, thin mortgage and interest margins, and potential for slowdown of capital market activity given the continued malaise in Europe and slower growth; can the six top U.S. banks sustain their growth?

Wells Fargo & Company (NYSE:WFC) has the most diversified business mix out of the six banks and has been bracing for declines in net interest income. 49 percent of Wells Fargo’s income is net interest income, 51 percent is non interest income. Wells Fargo also has a significant wealth management franchise with 30% of its non interest income generated by trust and investment fees. The bank’s lower exposure to investment banking and international banking also allows for less complex risk management models, which in turn help the bank minimize earnings volatility.

Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) have more international risk, which could pay off if there is a global economic recovery. The three banks also have strong brand name recognition and are working on lowering their expenses to maximize profits.

Regarding JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs Group, Inc. (NYSE:GS); revenues could be more affected by a decline in capital market and trading activity. To offset such decline, the three entities are focusing in expanding their asset management divisions and they have seen results. All three experienced positive inflows and increase in asset value due to capital market appreciation during first quarter of 2013.

The six largest banks are striving to maintain or increase earnings by reducing costs and focusing on fee oriented businesses such as asset management to offset declines in net interest margins. It is still a challenging time for them until lending improves, particularly small business loans. Asset management is also very competitive and margins have compressed, however, the six largest banks have brand recognition and established franchises going for them.


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