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A Key to Investing in the Regional Bank KeyCorp

PART:
1 2 3 4 5 6 7 8 9 10
Part 7
A Key to Investing in the Regional Bank KeyCorp PART 7 OF 10

Why KeyCorp Has a Low Net Interest Margin

Declining net interest margins

KeyCorp’s (KEY) net interest income was relatively stable compared to 4Q13 since loan growth and a more favorable mix of lower cost deposits mostly offset lower asset yields. Net interest margin (or NIM) for a bank is the difference between interest income generated and interest paid out as a percentage of interest-earning assets.

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Net interest margins typically trend higher in an increasing interest rate environment. Banks raise the interest they charge for loans faster than what they pay on deposits, giving an immediate boost to margins. A sustained low rate environment, on the other hand, affects NIMs negatively.

You can read more about the impact of interest rates on banks’ margins in How Are Lower Interest Rates Impacting Banks’ Margins?

KeyCorp’s NIM was 2.94% for 4Q14, as shown in the graph above. The graph also shows the decline in NIM over the last two years due to the sustained low-rate environment. This is a trend for most banks.

NIM lower than peers

BB&T’s (BBT) NIM for 4Q14 is 3.36%. Regions Financial (RF) and Wells Fargo (WFC) also had higher NIMs at 3.17% and 3.04%, respectively. The average NIM for KeyCorp’s peer banks for the same period is 3.04%. BB&T and Regions Financial together form ~2.7% of the SPDR S&P Regional Banking ETF (KRE).

KeyCorp’s NIM is marginally lower than the peer average. NIM determines how effectively a bank is using its earning assets. The higher the ratio, the better. KeyCorp forms ~3.1% of the iShares U.S. Regional Banks ETF (IAT).

Higher levels of liquidity contributed to the squeeze in KeyCorp’s NIM, along with lower asset yields. While a level of liquidity is essential, too much unutilized funds result in lower earning margins.

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