BAC: Closing the Margin Gap with WFC


Over the last three years, the net interest margin at BAC has risen from 64% to 72% of that reported by WFC (with the corresponding figures being 80% and 90% if we adjust for the adverse impact of BAC’s trading activities). To some degree, this is because WFC has been more effective at gathering deposits leading to an adverse asset mix-shift from loans to securities.

  • Specifically, loans are 62% of interest-earnings (“IE”) assets at WFC down from 71% three years ago while the equivalent ratio at BAC has increased to 54% from 50%; BAC maintains a less favorable asset-mix in part because one-quarter of IE assets are associated with its trading book.

However, the margin gap has also closed because of relative improvements at BAC in key margin drivers including the yield on securities and, on the liability side, the tilt to low-cost savings account balances and non-interest bearing (“NIB”) deposits versus higher-cost, non-deposit debt:

  • The securities yield is 80% of that at WFC versus below 60% in 2010Q3
  • Savings account balances are 46% of IB liabilities versus 33% in 2010Q3; at WFC, the increase is less to 62% of IB liabilities from 56%.
  • BAC is now at near-parity with WFC around NIB deposits which represent 21-22% of IE assets at both banks; three years ago, the ratio was 14% BAC versus 17% at WFC.
  • Non-deposit debt is 46% of IB liabilities versus 58% in 2010Q3; at WFC, the ratio has also fallen but by less to 21% from 27%.

A key metric where BAC has lost comparative ground is the loan yield which is now 87% of WFC’s versus parity in 2010Q3. However, this is because BAC has de-risked its loan portfolio so that the risk-adjusted yield (i.e. loan yield less net loss ratio) improved to 80% from 50% of that of WFC.

We expect BAC to continue relative improvements in its balance sheet and the margin to continue to improve in absolute terms (even if rates remain unchanged) and relative to WFC (notwithstanding its proportionately higher savings account balances which tend to contribute more to margin expansion as rates rise). We note that BAC’s net interest margin troughed at 2.2% in 2012Q2 and increased to 2.4% in 2013Q3 despite an adverse rate environment; over the same period, the net interest margin at WFC declined from 3.9% to 3.4%.

Please see our published research for the full note.

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