Banks are more willing to lend money than they have been in 17 years. However, a key factor in profitability is being restrained due to slow loan growth. There is mixed consumer demand for these loans. Though demand for regular and bad credit auto financing increased, the need for mortgages declined and installment loans like credit cards experienced flat demand.
This lagging demand has been limiting the revenue growth of banks. The institutions are reporting strong profits but this is mainly due to releasing reserves for bad loan coverage. At most of the major banks, revenue growth has actually been decreasing.
This is a key reason for the poor performance of bank stocks over the past year.
Low revenue figures contribute to a small net interest margin, which is the difference between what banks earn on assets less the costs of liabilities like deposits. In 2010, bank depositors received only a 0.86 percent interest rate, the lowest since the 1950s.
The same year, big banks saw their net interest margin reach an eight-year peak of 3.77 percent. Since the first quarter of 2010, net interest margin has been steadily declining.
Maturing loans are either not being replaced or being replaced with loans featuring lower interest. This difficulty creating more loans is wiping out the positive aspect of holding cash from depositors at tiny interest rates. Bank customers are currently storing a record amount of 75 percent of their $5.9 trillion worth of bank deposits in liquid accounts paying only 0.44 percent.
During the next few years, short-term rates should rise, causing net interest margin to expand. Gradually increasing rates allow banks to raise loan rates faster than those for deposits. Wells Fargo plans to replace loans with debt carrying higher interest, while still maintaining its very low 0.35 percent consumer deposit costs.
