Many analysts anticipated a weak third-quarter earnings report for the U.S. banking sector due to net interest margin, or NIM, pressure. For some banks, it was even worse than expected.
After a busy first week of earnings season, dozens of banks have reported, including 25 banks with more than $26 billion in assets. Among those banks, almost half missed consensus estimates that predicted NIM compression. The median estimate declined by 6 basis points quarter over quarter and 17 basis points year over year.
Wintrust Financial Corp. missed its NIM estimate by the most of any bank surveyed with a 22-basis-point linked-quarter drop that fell short of the consensus figure by 15 basis points. While the bank reported robust growth in deposits, which rose $1.2 billion from the linked quarter, it paid a price, as its cost of interest-bearing deposits jumped 6 basis points. President and CEO Edward Wehmer downplayed the margin compression and said investors should focus instead on net interest income.
"I think everybody gets hung up on the margin," Wehmer said on the earnings call, according to a transcript. "I can't eat the margin. I can eat off net interest income — that's real money."
Analysts at Jefferies Research Services noted the severe NIM compression came from a 14-basis-point decline in loan yields and significant deposit generation at higher cost. Similarly, analysts from Keefe Bruyette & Woods wrote that the bank's build-up in excess liquidity was a significant factor in its NIM miss. Excluding that activity, Wintrust missed KBW's NIM estimate by a more modest 6 basis points.
Deposit costs rose in the third quarter for Wintrust and several other large banks, even though the Federal Reserve cut interest rates. For Wintrust, its cost of interest-bearing deposits rose 6 basis points, while SunTrust Banks Inc., M&T Bank Corp., Comerica Inc. and IBERIABANK Corp. each reported a 5-basis-point increase in deposit costs.
Some of those banks forecast even more NIM pressure through year-end. SunTrust executives said they expect an additional decline of 2 basis points to 5 basis points, assuming no additional rate cuts. If the Fed does cut rates at its Oct. 30 meeting — as the futures market expects — SunTrust's margin would decline an additional 3 basis points to 4 basis points.
IBERIABANK also updated its guidance to reflect potential NIM compression in the fourth quarter, with management predicting a 3.43% to 3.47% margin, compared to a 3.46% print in the third quarter. Management's guidance presumes an October rate cut.
Executives at First Horizon National Corp. took a more conservative approach in the bank's fourth-quarter guidance, building in two additional rate cuts. Even with two more cuts, management said it expects NIM to reach 3.25%, which would represent a modest expansion from the 3.23% margin reported in the third quarter.
First Republic Bank provided guidance for another decline in NIM, predicting a 5-basis-point slide in the fourth quarter, roughly matching the bank's third-quarter dip. Hancock Whitney Corp.'s guidance showed NIM compression of 2 basis points to 4 basis points in the fourth quarter.
Analysts generally expected NIM compression during the third quarter, as the Fed's rate cuts immediately reduce asset yields, but benefits to deposit costs take longer to realize. Third-quarter reports have shown stronger deposit growth than expected, which has limited the downward pressure on net interest income, Jefferies wrote.
"NII expectations will remain highly dependent on the outlook for future rate cuts and the shape of the yield curve, especially for smaller regionals given a larger dependence on spread income," Jefferies said.