The Federal Reserve recently released its quarterly Senior Loan Officer Opinion Survey, in which it said that the percentage of banks that reported they are more willing to make consumer installment loans has risen to its highest level since 1994, according to the Wall Street Journal.
Despite reporting solid profits, most major banks are experiencing shrinking revenue, and much of the profits have come from the release of reserves to cover bad loans. According to the survey, this is being caused by uneven consumer demand for loans. Demand for auto loans has increased, while credit card and other installment loans were flat and mortgage demand continued to decrease. This phenomenon explains why bank stocks have not been performing well - the KBW Bank Index fell by 7.9 percent in the past year - but the Dow Jones Industrial Average surged by more than 16 percent over the same time period, according to the news source. The low revenue is squeezing banks' net interest margin - the difference between what they earn on assets and the cost of deposits and other liabilities. Although NIM hit 3.77 percent in 2010 - the highest it had been in eight years - it has been steadily declining since the first quarter of last year. Consumers are making credit decisions
that typically involve replacing loans that mature with lower interest loans, or not replacing them at all, leading to first-quarter NIMs falling at Citigroup and Wells Fargo, as reported by the news source. "I don't wake up in the morning and actively worry about what is going on with my NIM," said John Gerspach, chief financial officer of Citigroup, who anticipates that the bank's NIM will stabilize in the second half. The only financial institution that experienced a rise in first-quarter NIM was JPMorgan Chase, according to the news source. However, short-term loan rates are expected to rise over the next few years, which will allow banks to boost the rates on loans faster than on deposits. According to Rochdale Securities analyst Richard Bove, banks' NIM will expand as rates rise. "JPMorgan Chase may outperform Wells Fargo, Citigroup and Bank of America for a year or two, but it won't outperform the market if banking fundamentals don’t improve from here," wrote Martin T. Sosnoff, chairman of Atalanta Sosnoff Capital, in a recent Forbes article. "Banks need to post revenue growth and show a widening net interest margin. Right now, this isn't in the cards."