The road back from a painful period of margin compression will be a long one, Bank of America Securities LLC analysts predict.
"Banks saw 72 basis points, on average, of margin compression over the last five years," B of A's John E. McDonald said in an interview Friday. "They may not even get half of it back."
In a report released Friday, Mr. McDonald and his team cite continued competition for loans and deposits, and conclude that even interest rate cuts would be of little help. "Lower short-term rates is not the optimal path to a steeper yield curve, because rate cuts actually give rise to a number of offsetting influences," Mr. McDonald and his colleague Kenneth M. Usdin wrote.
They are not alone.
"We are in that same camp," Gerard Cassidy, an analyst with Royal Bank of Canada's RBC Capital Markets, said Friday. "Margins are in a cyclical decline," driven down by long-term lending and funding trends.
Avi Barak, an analyst with Sandler O'Neill & Partners LP, was more optimistic. In a report released Thursday, Mr. Barak wrote that recent improvements in the yield curve could push second-quarter margins back to where they were in last year's third quarter.
The B of A analysts' report focused on the funding side as the "key to future changes" in net interest margins.
Rising rates on certificates of deposit and wholesale funding over the last five years squeezed margins by about 146 basis points, Mr. McDonald and Mr. Usdin wrote. That drop was partly mitigated by the 47-basis-point rise in asset yields and a 26-basis-point positive impact from the inflow of low-cost deposits, they said.
Margins will improve by less than 5 basis points, and any boost to earnings from fatter margins would be eaten up by rising credit costs, the B of A analysts predict.
"Banks face an average 4% [earnings per share] headwind from the rise in credit costs" between now and the end of next year, their report said. Margins "would need to rise by more than 10 basis points to offset this increase."
The problem is worst for Midwest companies, because their credit costs have been even more benign, Mr. McDonald said.
Fifth Third Bancorp, for example, needs a 32-basis-point lift in margins to counter higher credit costs, PNC Financial Services Group Inc. 28%, Comerica Inc. 20%, and National City Corp. 19%.
