Strong net interest margins
Maintaining a high net interest margin has always been part of Wells Fargo’s (WFC) strategy. The net interest margin is the difference between interest income generated by loans and interest paid on deposits divided by their total assets.
Wells Fargo has consistently been better than the industry’s average net interest margin. JP Morgan (JPM) and Bank of America (BAC) have lower net interest margins than Wells Fargo. The only bank that’s large enough to beat Wells Fargo is U.S. Bank (USB). USB is part of the Financial Select Sector SPDR (XLF).
How can a bank achieve a high net interest margin?
Let’s see how a bank achieves a high net interest margin. A bank can have a high net interest margin if it achieves one or both of the following:
- A high interest rate charged on loans
- A low interest rate given on deposits
A high interest rate on loans suggests that the bank has good pricing power on loans. It can charge more and also pass increased costs through to loan customers. A low interest rate on deposits indicates that the bank has strong relationships and a large franchisee network. Customers don’t shift their deposits often. In the previous part in this series, we saw that low cost deposits are one of the main parts in Wells Fargo’s strategy.
Why is a high net interest margin important?
A high net interest margin is very important for banks. It’s important for two main reasons.
- High net interest margins indicate that a bank is able to earn more profits on the loan it gives.
- High net interest margins help a bank have a higher level of cushion on a loan. If the economic cycle turns decreases and insolvency increases in the future, higher net interest helps banks absorb a higher degree of shocks.
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