U.S. Banking Quarterly Comment - 2Q19 (Margin Compression Begins as Yield Curve Flattens, Short-Term Rates Fall)

...Bottom Lines Up Sequentially; Mixed YoY: On a dollar-basis, bottom line results for the 19 large U.S. banks included in this report were almost all improved compared to 1Q19 driven by fee revenue growth in core business lines and good cost controls, but offset by modestly lower net interest income (NII) and slight reserve builds. Relative to the year ago quarter, results were much more mixed with only half of the banks reporting stronger earnings results as positive operating leverage has waned and net interest margins (NIMs) have dipped. As shown below, the median reported return on average assets (ROA) ratio dropped by 5 bps from a year ago. Margins Begin Contraction: As expected by Fitch, banks across the industry experienced sequential NIM contraction on both a sequential and YoY basis. On analyst earnings calls, management teams pointed to short-dated LIBOR falling ahead of the anticipated Fed rate cut, causing indexed loans to reprice downward. Moreover, the yield curve flattened...

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