U.S. banks face lower profitability as net interest margins shrink

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U.S. banks face lower profitability as net interest margins shrink


The News and Expert Opinion

U.S. banks are experiencing lower profitability as their net interest margins (NIM) - a key measure of banking performance - are squeezed by higher funding costs and lower loan demand. This trend is expected to continue until at least the end of 2024, even if the U.S. Federal Reserve cuts interest rates, according to analysts.

NIM is the difference between the interest income a bank earns from lending and the interest expense it pays to depositors. A higher NIM means a bank is earning more from its core business of lending, while a lower NIM means a bank is paying more to attract and retain deposits.

The U.S. Federal Reserve’s interest rate hikes since 2015 have increased the cost of deposits for banks, as customers have shifted their funds to higher-yielding alternatives, such as money market funds. To compete for deposits, banks have had to offer higher rates, which has eroded their NIM.

At the same time, the demand for loans has slowed down, as the U.S. economy has cooled off and the trade tensions with China have dampened business confidence. Lower loan demand means lower interest income for banks, which also hurts their NIM.

According to data from S&P Global Market Intelligence, a research and data analytics firm, analysts expect NIM compression for 16 of the 20 largest U.S. banks in 2024, with a median decline of 14 basis points for the group. A basis point is one-hundredth of a percentage point.

Some of the banks that are projected to see the largest NIM declines are Wells Fargo, Bank of America, Citigroup, and JPMorgan Chase, which are among the top four U.S. banks by assets. These banks have large exposure to consumer and commercial lending, which are more sensitive to interest rate changes.

The outlook for NIM is unlikely to improve before the end of 2024, even if the Fed cuts rates, as some analysts expect. A rate cut would lower the interest income for banks, but it would not necessarily lower the interest expense, as banks may still have to compete for deposits in a low-rate environment.

Therefore, U.S. banks will have to find other ways to boost their profitability, such as cutting costs, increasing fees, diversifying revenue sources, or pursuing mergers and acquisitions. However, these strategies may also face challenges, such as regulatory scrutiny, customer backlash, or market volatility.




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Source: Yahoo Finance


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