Guns or butter, loans or yields.
Comments about cutthroat price competition for loans have been a frequent refrain among bankers for months, and appear to be echoed in data on growth and return ratios. As shown in the following graphics, some lenders have posted leaps in volume — only to give up more in portfolio yield than competitors. (Interactive controls are described in the captions. Text continues below.)
At Western Alliance (WAL) in Phoenix, loans increased 16% in the year through March 31 to $4.8 billion, while the yield on the company’s loan portfolio fell 41 basis points to 5.6%. Both moves were sharper than at the vast majority of peers pictured, which are made up of holding companies with assets of $3 billion to $10 billion. (Companies that completed branch and bank acquisitions between April 1, 2011, and March 31 have been excluded to focus on organic growth, though some bought pools of loans during the period.)
Western Alliance continued to post strong loan growth in the second quarter — an annualized increase of about 20% — and said its margins would continue to erode as new loans were being booked at yields about 60 basis points lower than loans that were paying off.
The overall decline in asset yields is unsurprising in this era of low rates, however, and loan yields tell only part of the story. Cash and securities typically earn less than loans, and the growth has helped reweight Western Alliance’s balance sheet toward loans, which accounted for 70% of assets at March 31, up from 65% the year before.
Meanwhile, the company’s yield on earning assets declined just four basis points, to 5%. That compares well with competitors.
In an earnings call in last month, Western Alliance Chief Financial Officer Dale Gibbons emphasized the company’s projection that its net interest income would continue to increase this quarter, with loan growth outmuscling margin compression.
A multitude of factors affect growth rates and fluctuations in yield, and the direct relationship between the two is loose: statistically, the regression lines shown in the graphics explain their correspondence weakly.
Operating in a region marked by healthy economic growth, or having an established presence in a lending niche that is showing momentum may be stronger forces. In a note in July, analysts with KBW wrote that Western Alliance “has benefited somewhat from a less crowded landscape in Arizona and Nevada as smaller players have largely exited these markets,” but that “California pricing pressure remains particularly acute.”
In general, net interest margins have been surprisingly resilient, with banks demonstrating the ability to continue to lower funding costs despite rock-bottom short-term rates. Besides, for companies like Wells Fargo (WFC), which has repeatedly said it does not “manage to the NIM,” the bottom line and customer relationships that will endure through the rate cycle are more important.