Low long-term interest rates are negative for bank net interest margins
(NIMs), as the US 10Y Treasury Yield exhibited a 75% correlation with
regional bank NIMs since 1990. As Credit Suisse Interest Rate Strategist
Dominic Konstam forecasts a sub 3% US 10Y Treasury yield over the next
year, regional bank NIMs could face pressure as fixed rate loans continue to
refinance to lower rates, and banks invest deposits in low-yielding
investments due to weak loan demand. While the interest rate environment
may slow the ability for NIM to improve, we believe banks with (1) a high
level of variable-rate loans refinancing, (2) a high level of CDs and other high
cost deposits re-pricing, and (3) above-average liquidity levels could
positively surprise investor expectations for NIM improvement.
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Theme: The "NIM Handbook" outlines the factors that impact NIM, in
addition to quantifying the expected changes. While this entire report only
focuses on one income statement line item, net interest income, this line
item represents 65% of regional bank revenues and is a key factor for
determining normalized earnings.
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Positive Implications for CMA, FHN, SNV: We are raising our 2010 EPS
estimates and target prices for each, as we believe the potential impact from
variable-rate loans to be refinanced at wider spreads is high; while CMA will
also benefit from a large runoff of high cost deposits over the next year. Due
to FHN's bi-polar business mix (high NIM in footprint, low NIM in national
segment), FHN will improve its NIM faster than peers as the low-yielding
national segment business runs off, in our view.