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PNC Bank continues to have sluggish net interest margin

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Feb. 25 2015, Updated 9:05 a.m. ET

Net interest margin indicates pricing power

Net interest margin is the spread between the percentage income earned on loans by a bank and the percentage interest paid to lenders (generally depositors). A bank that has good demand for loans can charge a premium over market interest rates for its loans. More importantly, a bank with good risk practices will be able to price its loans for the level of risk.

Similarly, a large and well-located branch network, superior information technology infrastructure, and top-notch customer service can attract deposits at lower rates. So, a good bank will be able to have higher interest rates on loans and lower rates on deposits. This is one of the strongest indicators of pricing power for a bank.

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PNC’s net interest margin on the way down

PNC Bank’s (PNC) net interest margin has continued to fall in the last few years, with average earning assets standing at nearly $290 billion at the end of 2014. This was an increase of approximately $56 billion from the beginning of 2012. However, net interest income from those assets fell by nearly 11.6% in the same period, mainly been because the bank priced its interest rates lower.

PNC’s fall in net interest margin passes its peers

We can see clearly from the graph above that the net interest margin for PNC Bank now stand lower than the average of its peers. Its peers include Wells Fargo (WFC), US Bank (USB), and Capital One (COF). This has largely because the bank was not aggressive enough in decreasing its cost of funding. This is one of the downsides for the bank. Many banks in the Financial Select Sector SPDR ETF (XLF) portfolio have been able to manage their net interest margins more effectively.

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