Big US banks' net interest margins mixed in Q2 amid industrywide expansion

Sequential changes in net interest margins at the biggest US banks were mixed in the second quarter as the industry advanced on that measure overall, helping to support stock outperformance among regional and community banks.

The median net interest margin (NIM) among the 20 largest publicly traded banks declined 1 basis point sequentially, with declines ranging from 1 basis point to 9 basis points among the five largest, according to data from S&P Global Market Intelligence. The industrywide median was an increase of 3 basis points for banks that had posted results by July 31.

Most banks anticipate sequential net interest income (NII) growth from second-quarter levels, though the interest rate environment has abruptly realigned again toward expectations for faster and deeper Federal Reserve cuts after a disappointing employment report Aug. 2, Jefferies analysts said in an Aug. 6 note reviewing large-cap bank guidance from earnings reports.

"More cuts could be modestly more negative for the universal banks given they are relatively more asset-sensitive than the regionals," the analysts said, adding that lower medium-term rates could also hinder asset-repricing tailwinds for many regional banks while "faster downside deposit [repricing] and a return to volume growth" could deliver an offset.

The NIM gains across publicly traded banks came despite flat deposit levels sequentially at the median institution. Upward deposit price pressures have been easing, and some banks that posted the biggest sequential declines in deposits in the second quarter shed high-cost balances.

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NIM optimism

The NIM improvement across banks covered by Raymond James was the first since the fourth quarter of 2022, and represented a "significant positive surprise" relative to consensus expectations and performance in the first quarter, analysts at the firm said in an Aug. 5 note.

"The primary driver of better NIM results was lower funding costs pressures," they said, adding that migration out of non-interest-bearing deposits slowed.

"We expect deposit remixing will continue to slow, and potentially begin to reverse with rate cuts," they said. "With Fed rate cuts probable given recent Fed commentary and inflation [and] employment data, deposit costs are likely at the peak."

Deposit declines

Among the 20 banks with the biggest sequential contractions in ending-period deposits in the second quarter, the median decline was 5.0% compared with a 0.01% median decline for all publicly traded banks. The group's median NIM expansion was in line with the industrywide median of 3 basis points.

Overall deposit declines at some of the banks reflected outflows of high-cost deposits. At M&T Bank Corp., total deposit costs were flat sequentially while its cost of interest-bearing deposits declined 3 bps. Its average total deposits fell $574 million sequentially while its average brokered deposits fell $1.20 billion.

CFO Daryl Bible said the bank expects to "pretty much" exit brokered certificates of deposits by the end of the year, and that for deposits overall, "we continue to just see more rational pricing in the marketplace."

"Deposit cost trajectories from here will vary by bank as some chip away at higher cost offerings while others face lingering competition," Jefferies analysts said in an Aug. 1 note on large-cap and mid-cap banks. "The trajectory for deposit costs in a cutting cycle will depend on mix, with commercially oriented deposit bases likely to re-price quicker than consumer."

Cash and securities

Combined changes in cash and securities levels across publicly traded banks with more than $50 billion of assets were modest, with median increases in cash and available-for-sale (AFS) securities offset by a median decrease in held-to-maturity securities.

Some individual banks posted large swings however, as they proceeded with balance sheet repositionings, looked to shift into bonds ahead of potential rate cuts, or continued to manage liquidity positions.

At Truist Financial Corp., cash and equivalents increased 17.9% sequentially and AFS securities declined 15.3%. The bank sold its insurance brokerage, using much of the capital generated by the transaction to support a balance sheet restructuring under which it unloaded low-yielding securities and added cash and bonds at current market rates.

At New York Community Bancorp Inc., cash and equivalents increased 47.3% and AFS securities increased 12.8% as the company continued to build liquidity as a part of its turnaround effort.