Loans have been growing substantially
As we discussed in the previous part of this series, yields on Wells Fargo’s (WFC) loan portfolios are expected to inch downwards in the third quarter after the Federal Reserve decided not to hike interest rates. However, loan demand has picked up in the United States (SPY), as investors are entering the market while rates remain low.
For Wells Fargo, core loans have risen by 9% in 2Q15 compared to the corresponding period in 2014. Core loans increased 4% compared to 1Q15. Commercial loans increased by $22.8 billion for the bank in the last quarter.
This high loan growth has offset the decline in yields during the past quarters, and Wells Fargo was able to generate growth in its net interest income unlike competitors such as J.P. Morgan (JPM), Bank of America (BAC), and Citigroup (C).
Net interest income to increase because of high loan growth
Net interest margins for the second quarter fell to 3% for Wells Fargo from 3.1% in 3Q14. However, net interest income rose to $11.3 billion from $10.9 billion.
The net interest margin is calculated by dividing a bank’s net interest income by its average earning assets. Thus, the net interest margin communicates the yield on a bank’s portfolio of loans, fixed-income securities, and other interest-earning assets.
Until the Federal Reserve increases interest rates, banks’ margins will remain under pressure. Currently, banks are having to make sacrifices with yields to generate demand for loans.