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Loan-to-deposit ratios — a key gauge of how much banks have to rely on outside sources funding — have been plummeting at regional banks across the country as consumers save more and banks lend less.
May 2 -
Though the banking industry eked out a profit and boosted capital during the third quarter, a retreat from risk and a significant drop in overall lending proved that it is still far from business as usual.
November 24
Expectations are sinking that big banks can continue to capitalize on their balance-sheet spreads.
Net interest margins expanded at most of the nation's biggest banking companies in the first quarter compared with the previous quarter, suggesting banks have found another way to counter continued credit losses. But banks will be hard-pressed to hold on to these healthier spreads amid sluggish loan demand and potentially higher interest rates.
"The best they can do over the rest of this year is maintain" margins, said William Fitzpatrick, an analyst at Optique Capital Management in Racine, Wis. He said most of the expansion that took place last quarter likely resulted from aggressive balance-sheet management in recent periods.
"Banks will be thrilled if they can keep the margins they have now," Fitzpatrick added. "This is something we'll be watching closely over the next couple of quarters."
In the first quarter, margins widened at 14 of the 15 biggest banking companies. The median rose 5 basis points from a quarter earlier, to 3.32% — its highest point in more than a year — according to data provided by the companies. Expansion was even more pronounced for the five biggest banks, whose median margin widened by 40 basis points.
The main reasons were aggressive repricing of deposits and low interest rates, but there were others.
Most of the biggest banks benefited from an accounting change that required them to bring billions of dollars in receivables on to balance sheets during the quarter. Such receivables, many of which included consumer products like credit cards, carry high yields that would have aided margin expansion, analysts said.
D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte, said bringing these types of loans on the books provided "another boost" for banking companies like Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. Those companies also have an advantage over smaller competitors, he said, because they are better able to use purchased funds, instead of normally higher-cost deposit gathering, to bolster their balance sheets.
Margins rose more than 30 basis points at Bank of America and JPMorgan Chase in the first quarter, and Citigroup's rose 67 basis points.
Wells Fargo & Co. was the only big bank whose margin compressed in the first quarter — by 4 basis points from a quarter earlier, to 4.27%. Its margin remained the best among the biggest banks, which analysts attribute to its large consumer banking operations. Those operations grew with Wells Fargo's 2008 purchase of Wachovia Corp.
Howard Atkins, Wells' chief financial officer, told analysts during the San Francisco company's quarterly call last month that the drop reflected a willingness to pay more for deposits to keep them coming in, coupled with weak loan demand. "The deposit growth … is really winding up being invested in short-term cash," which is good for liquidity, Atkins said. "We will take the deposit growth," he said. "And we will just have to see where loan demand goes."
Regional banks have been aggressively repricing customer deposits to reduce funding costs. In recent months many banks have shifted customers to lower-cost products such as money market accounts once higher-yielding certificates of deposit matured. Such was the case at regionals Regions Financial Corp., KeyCorp, PNC Financial Services Group Inc. and Fifth Third Bancorp.
Bankers are divided as to how much leeway remains to further reduce funding costs by shifting the deposit mix.
O.B. Grayson Hall, Regions' chief executive, expressed confidence that the company would see margins expand over the next two quarters after moving "the bulk" of $8 billion in higher-rate CDs to lower-cost products in the first quarter. Regions, which has another $10 billion in deposits that can be repriced in 2010, is lagging many regional banks, with a margin of just 2.77%.
"We continue to have a clear focus on executing our plans to achieve a better net interest margin in the future," Hall said, forecasting a 3% spread by yearend. (Regions also plans to let a hedge expire in the third quarter, which will make the Birmingham, Ala., company more sensitive to a rise in interest rates.)
Jeff Weeden, KeyCorp's CFO, said the Cleveland company's margin could widen by 5 basis points this quarter as it reprices certificates of deposit it booked more than two years ago. "We expect this trend to continue during the balance of 2010," he said during Key's quarterly conference call.
Rick Johnson, PNC's CFO, was more skeptical, telling analysts that the Pittsburgh company's margins could face "a little pressure towards the end of the year" despite $19 billion in relatively expensive CDs set to mature. There are limits to how far bankers can go in lowering deposit rates, he said, and roughly a fifth of PNC's deposit relationships leave when rates fall. PNC has also improved margins by weaning itself off deposits with the Federal Reserve.
As time goes on, lending volume will play an even bigger role in margins' ability to expand, analysts said.
Plath noted that banks have more control over the terms of new loans than in previous years, "which should soften the blow and allow them to maintain their margins." The problem involves tepid demand, which remains the norm and may continue for several quarters. "At the same time, big banks will see an increase in funding costs" as rates rise, he said.
Fitzpatrick agreed that margins could remain in a holding pattern until banks are able to find enough good borrowers to capitalize on market conditions. "We're in a very attractive yield-curve environment, but not much has changed on the loan side," he said.
