Regional Banks: The Dynamics of Net Interest Margins at Selected US Banks
The role of CMA, MTB, and KEY as favored “asset sensitive” plays on rising rates leaves them over-valued relative to our regression model, and particularly to BAC and COF. Ironically, over the last 12-months BAC and COF were the only banks in our sample (along with RF) to show margin improvement and outperformed peers on both the asset- and liability-sides of the balance sheet.
- The exhibit below illustrates this by breaking down the change in net interest margin (NIM) into contributions from interest-earning (IE) assets and from liabilities, and further unbundling the liability side into contributions from interest-bearing (IB) liabilities and NIB funding (e.g. non-interest-bearing deposits and equity).
- In our margin model, described in the Appendix, the change in NIM is the sum of the asset and liability contributions along with the change in the slope of the swap curve (measured as the difference between the 3-year swap rate or 3YS and 6-month Libor or 6ML); this was 0.45% over the period of the Exhibit.
Given short rates fell over the last 12-months, margin-underperformance by “asset sensitive” banks is consistent with consensus. However, this appears coincidental: the data show no correlation between the standard measure of asset sensitivity (i.e., the tilt to C&I loans) and the change in net interest margins, and we do not expect a correlation to appear despite the more pronounced rate moves discounted in the forward markets (indicating a move in 6-month Libor to 1.1% by mid-2015 versus 0.35% in 2013Q4 down 0.2% from the year-ago quarter).
Regardless, all interest-earning (IE) assets re-price eventually so that, even if asset-sensitive banks respond to rising rates by delivering strong near-run earnings, it is a double-count to value these earnings at a premium multiple.