Sunday, August 4, 2013

Net Interest Margin's Angle of Descent

Net Interest Margin

Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of non-financial companies.

Click to enlarge.

This is your pilot. I have some good news and some bad news.

First, the good news. Thanks to the temporary benefit of ZIRP, we temporarily gained some altitude. We actually broke the long-term trend towards the ground (as seen in the blue trend line above). Hurray!

Now, the bad news. The plane has stalled. We'll be coming in a bit steeper than we had originally planned (as seen in the red trend line above). Please brace for "dramatic changes in cabin air pressure".

Click to enlarge.

I do have some more good news though. We're making excellent progress on our long-term plan to catch up to the Japanese banking system. A mere -0.03% per year? You call that a descent angle?

In all seriousness, if the net interest margin actually does rise from here then it probably won't be because banks suddenly decide to pay less interest to depositors. The typical yield of a 5-year CD is now just 0.5%. How much further can it fall? Amazingly, that's 0.9% less than a 5-year treasury that doesn't even require FDIC deposit insurance. In general, banks must have one heck of a marketing staff.

Survey: CD early withdrawal is costly

Savers who dump low-yielding CDs before maturity may pay a steep price, according to a Bankrate survey of early withdrawal penalties at 100 institutions.

Almost all of the institutions surveyed -- 92 percent -- not only levy a penalty, but also reach into principal to cover fees if necessary.

Source Data:
St. Louis Fed: Net Interest Margin for all U.S. Banks
St. Louis Fed: Bank's Net Interest Margin for Japan

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