It's back to the future for many bankers — squeezing profits from tiny margins.
Things started looking up in 2015 as net interest margins rose after having fallen for years, but they dropped again in each of the last two quarters. At midyear the average NIM was 3.08%, or 8 basis points off where it stood on Dec. 31.
The trend is forcing banks to take steps like buying municipal bonds and other higher-rate (and higher-risk) securities. They cannot lower their deposit costs to compensate, as certificates of deposit and savings accounts are already scraping the pavement.
Margins are being squeezed by a combination of factors, including a nosedive in 10-year Treasury yields, an increase in borrowing costs and the repricing of loan portfolios where higher-rate assets are replaced with lower-rate assets.
"Each quarter brings to maturity more loans and securities that were originated years ago at higher rates," said Joe Gladue, an analyst at Merion Capital Group. "They are replaced with assets bearing today's lower rates, putting continual pressures on [margins]."
Since hitting 3.84% in the first quarter of 2010, net interest margin for the entire industry had fallen 76 basis points as of June 30, according to BankRegData.com. Numerous money-center and regional banks reported significant quarterly declines in the second quarter, including JPMorgan Chase's 4 basis-point drop, an 8-basis-point decline at Citigroup and a 5-basis-point fall at U.S. Bancorp.
Yields on the benchmark 10-year Treasury stood at 1.518% in Wednesday morning trading, down from 2.245% on Jan. 4. Until the Federal Reserve raises rates, there is really not much else banks can do, Gladue said.
"If markets were convinced that the rate hikes were the result of improving conditions, we could get a steeper-sloping yield curve, which would lead to expanding [margins]," he said.
Higher borrowing costs are also taking a toll. Many banks have issued subordinated debt to raise capital in recent months, trying take advantage of the lower rates. However, subordinated debt is more expensive than using core deposits to fund lending.
The $37 billion-asset Signature Bank in New York attributed some of its NIM decline to a $260 million subordinated-debt issuance in April. Signature's NIM narrowed 11 basis points to 3.28% on a linked-quarter basis, according to its call report.
Other types of borrowings are also hurting margins. Federal Home Loan bank advances in the first quarter at Comerica rose more than fivefold to $2.8 billion on a quarterly basis. As a result, the $71 billion-asset Comerica's net interest margin at the holding company level narrowed 7 basis points to 2.74%, also on a quarterly basis. Comerica attributed 2 basis points of compression to higher FHLB borrowings, 4 basis points to lower loan yields and 1 basis point to low yields on its Fed account holdings.
Other banks had their own specific issues that compounded the situation.
The $99 billion-asset KeyCorp in Cleveland had to maintain higher liquidity levels to secure regulatory approval for its acquisition of First Niagara Financial Group in Buffalo, N.Y. Consequently, net interest margin at its KeyBank unit narrowed 13 basis points to 2.77% from the first quarter.
Banks are taking several steps to defend what little margins they have left. Cullen/Frost Bankers in San Antonio added more than $730 million of municipal bonds to its securities portfolio in the second quarter. That helped the $29 billion-asset holding company for Frost Bank widen its margin by 10 basis points to 3.57%, on a yearly basis.
The $27 billion-asset First Horizon National in Memphis, Tenn., has tried to moderate its tendency to be hurt by declining rates through adjustments to its account balances at the Fed. It also agreed to acquire $637 million of restaurant franchise loans from GE Capital, to protect its margins.
"We think we can defend the margin pretty well," Bryan Jordan, chairman and chief executive, said during a July 15 conference call.
Flushing Financial in Lake Success, N.Y., has re-entered the market for commercial real estate that is not tied to multifamily properties. That has helped the $6 billion-asset institution book loan yields that are about 75 basis points higher than multifamily loans, said Collyn Gilbert, an analyst at Keefe, Bruyette & Woods.
Banks are also trying to compensate for tight margins by trimming head count at retail branches and replacing tellers with so-called universal bankers who can cash consumers' checks and also give them advice on a car loan. In one such example, non-interest-bearing deposits have grown 23% on a yearly basis at Flushing, which has implemented the universal banker tactic at all its branches.