Banks have scaled back some of their lender-friendly loan structures like Libor floors and extra covenants. And borrowers soon could get even better deals from lenders. That’s the conclusion some analysts have drawn from the narrowing of net interest margin (NIM) at several of the biggest US lenders, disclosed in their fourth-quarter financials.
According to Fitch, the average year-over-year NIM compression for banks that have reported fourth-quarter earnings stands at 15 basis points. The biggest declines were at Wells Fargo (narrowed 33 bps) and JP Morgan Chase (30 bps).
Large deposit inflows are to mainly to blame, although the receptivity of the junk bond markets has decreased demand for loans. A lower rate environment in Europe, the slowing of mortgage refinancing activity and that fact that bank loan repricings have run their course will reduce opportunities for banks to generate earnings.
The falling NIM has not cut into bank earnings yet since the cost of deposits has also fallen. However, banks’ willingness to cut deals on loans may increase if NIM continues to decline in 2013.