trending Market Intelligence /marketintelligence/en/news-insights/trending/80VgabuVXi4gVaXtXts6rQ2 content esgSubNav
In This List

Rate-squeezed Q4 big bank earnings could be as good as it gets


Banking Essentials Newsletter: January 11th Edition


Banking Essentials Newsletter December 21st Edition


The Road to Basel IV: Navigating the challenge facing European banks


Basel Framework- Utilizing data to analyze the capital position of European banks.

Rate-squeezed Q4 big bank earnings could be as good as it gets

The rate environment may not be as ominous as it was a few months ago, but analysts still anticipate that the largest U.S. banks will post substantial net interest margin compression in fourth-quarter 2019 reports, helping to drive broad-based declines in earnings and revenue.

"We see asset yields repricing lower, and deposit costs sort of flattish," Moody's Senior Vice President Allen Tischler said in an interview. With the Federal Reserve signaling that it is on hold, and with little room for credit quality to strengthen further, "profitability is about as good as it can get," said Peter Nerby, also a senior vice president at Moody's.

Compared with last summer, when an inverted yield curve stood as a warning about the potential for a near-term recession, large banks' tone in December presentations was relatively upbeat. Bank of America Corp. said its net interest income for the year might be a "bit better" than its previous forecast. Wells Fargo & Co. said rates are "better than we might have imagined during the middle of 2019," although they do not offer a "breakout" opportunity.

SNL Image

But while three Fed cuts in the second half of 2019 and a recovery in long-term rates have restored the yield curve to a positive slope, the gap between benchmarks sometimes used as proxies for bank assets and bank funding remains relatively narrow compared with much of 2018. "So far, the yield curve is somewhat of a non-event," Janney Montgomery Scott analyst Christopher Marinac wrote in a Jan. 2 note.

Further, overall rates are still far lower than they were a year ago. "It's not just about the yield curve. It's really about the level of interest rates," said David Fanger, another senior vice president at Moody's. "That has a more direct impact."

Consensus analyst forecasts anticipate that all 14 publicly traded banks with more than $100 billion of assets will post quarter-over-quarter declines in NIMs for the period, led by a drop of 13 basis points at Wells Fargo to 2.54%. Wells Fargo's margin has been impacted in part by sales of high-yielding option adjustable-rate mortgages that it originally acquired when it bought Wachovia Corp. The median decline forecast for the group is 7.5 basis points.

Moody's expects relatively tough going for banks from here, based on its forecasts for slowing economic growth and its view that downside "tail" risks are building. "It's going to be a challenge for banks to improve their margins in the environment we're expecting for 2020," Tischler said.

SNL Image

Analysts at Keefe Bruyette and Woods expressed a similar view. The giant, diversified banks will "struggle to have positive operating leverage against a flattish yield curve and growth that remains fairly anemic," they wrote in a note in December, adding that they believe rates are more likely to move lower than higher.

Further declines in deposit costs should provide some relief to banks, and analysts at Jefferies do expect NIMs to stabilize in the fourth quarter of 2019 and the first quarter of 2020 if the rate environment holds. In a note on Jan. 7, they also underscored hedging strategies used by banks like Fifth Third Bancorp, Regions Financial Corp. and Huntington Bancshares Inc. that are designed to sustain margins.

But bank NIMs will enter 2020 at weakened levels, and the Jefferies analysts forecast flat net interest income for the year amid relatively slow loan growth.

With NIMs expected to compress in the fourth quarter, consensus estimates also forecast that EPS will decline from the previous quarter at 11 of the 14 large banks. Consensus estimates also forecast quarter-over-quarter declines in revenue at 11 of the 14 banks.

Analysts broadly expect credit performance to remain healthy, with consensus estimates penciling the group in for a median quarter-over-quarter increase in net charge-offs to average loans of just 1.5 basis points.

To some extent, strong credit performance is the flip side to moderate loan growth. "The banks have been pretty disciplined in terms of expansion of their loan portfolios, which from our perspective as credit analysts has been good," Tischler said, adding that reaching for growth could generate credit problems.

But analysts widely expect credit losses to at least tick up from levels that appear to be cyclical lows. While a return to an upwardly sloped yield curve implies that recession fears have subsided, analysts at Sandler O'Neill said in a note in December, "all eyes remain locked on the eventual turn in the credit cycle."