For the majority of bankers, maintaining or increasing net interest margin (NIM) is the single most significant focus today. The shape of the yield curve and lower rates have caused NIM compression across the board and have hurt bank equity performance. While we are not big fans of managing bank performance using NIM as it doesn’t take into account risk and cost, it is one of the most common performance metrics used in banking.
Tag: Net Interest Margin
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Net interest margin (NIM) is one of the most over-utilized metrics in banking. As we have pointed out in the past, if you include all the failed banks over the last ten years, the statistic is about 20% predictive of underperformance. Thus, if you manage your bank trying to get the largest NIM possible, you are likely to produce less profit, not more. Of course, all things being equal you want wider NIM loans than not, but all things are rarely equal.
Net interest margin (NIM) is currently the most widely used performance measure for commercial loans and for community banks. Community banks are working very hard to maintain NIM and thus profitability (ROA) – or, so the thinking goes. However, the sole focus on NIM is actually not only hurting banks’ performances, but we contend that it is one of the major contributors to industry consolidation and bank failures.
Many bankers and investors think rising rates will automatically translate into larger net interest margins (NIM) and greater profits. While first quarter data will likely show the first increase in aggregate loan yield since 2007, it remains to be seen how much of that increase gets translated into wider NIM for community banks at the end of 2017.
Here at CenterState Bank, we specialize in Florida. Now, Florida has a lot of things going for it, but it has at least two major things going against it. One is an unspoken rule that if you own a bar or restaurant with an open-air patio, you have to have some guy impersonating Jimmy Buffett on a stool wearing a flowered shirt singing for tips. These guys are everywhere, and if you live here, it gets old. The other major drawback is that hunting for the highest rate on your deposits is a national pastime only eclipsed by baseball and trying to stay out of sinkholes.
The Bureau of Labor Statistics’ Nonfarm Payroll report for the month of May was weaker than most market participants predicted with just 38k jobs created. The unemployment rate, however, came in lower than expected at 4.7% and the average hourly earnings growth was reported at 2.5%. So how will the Fed interpret this data and how will the Fed’s actions affect your bank’s NIM and earnings? Between the two perceivable options of keeping interest rates at their curre