Loans are expected to grow, but yields will remain under pressure
Wells Fargo (WFC) operates as a traditional bank. An important metric to look at for banking companies is the average deposits to average loans ratio.
As discussed in the previous part, yields on Wells Fargo’s loan portfolios are expected to inch downward in 1Q16 despite the Federal Reserve’s interest rate (TLT) hike in December. This is because global volatility and falling oil prices have nullified gains from a rate hike. Loan demand, however, may pick up in the coming quarter as economic fundamentals show signs of improvement.
In 4Q15, WFC’s total average loans rose 7% to $916.6 billion, while its average deposits rose 6% to $1.2 trillion. Its net interest yield fell to 4.1%.
WFC’s net interest income rose 4% to $11.6 billion, driven by growth in earnings assets and higher variable income. Its net interest margin, however, fell by 4 basis points to 2.9% compared to 3Q15 as higher loan growth was offset by even higher deposit growth.
A net interest margin is calculated by dividing a bank’s net interest income by its average earning assets. In this way, the net interest margin communicates the yield on a bank’s portfolio of loans, fixed-income securities, and other interest-earning assets.
This high growth of the company’s loans offset the fall in its yields during recent quarters, and the bank was able to generate growth in its net interest income, unlike its competitors JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C).