How can you see increased net interest income and loan growth despite the reality of compressed margins and falling NIM%?
Asking any of these questions to yourself today?
- How do I succeed in the “New Normal” of tight margins and low rates?
- What role does customer-centric pricing play in this landscape?
- How do I grow loans and Net Interest Income and not be left behind firms that are already excelling in this new environment?
Keep reading then.
The 10-year treasury in the last 12 months has dropped from a high of 3.24% to 1.76% and has recently been under 1.50%. Low yields look to be the new normal, meaning compressed margins and increased competition. On top of that the IMF’s (International Monetary Fund) chief economist cut its global growth forecast yet again.
This sounds like a recipe for struggling earnings in the yield sensitive financial industry, but that is not what is happening across the board as many financial institutions flourish.
There is a confluence of factors, both firm specific and macroeconomic, that lead to their success but at the core loan growth is propelling Net Interest Income forward even as Net Interest Margin compresses. One quarter into this “new normal” and three quarters into declining rates and JP Morgan and its peers are thriving. JPM, BofA, Citi, Wells and Goldman are all trading above their 12-month average in the current environment. Goldman's price to book value is 0.9079, trading below book value. The difference is Goldman is less diversified in loans, which they are actively trying to fix. As their loan growth increases, I think you will see them trading above book value as they become more diversified and a power player in the lending space.
But how long can this last? As bank loan portfolios age and higher yield assets run off and are replaced by lower yield assets, can this be sustained? Before we jump into that, let’s look at the broader macro-economic environment.
Looking at the housing price index. It is 271, that's an increase of almost 100 points from June 2011 when it was at 177. This equates to massive equity being created within the housing market and for consumers. Debt is rising slower, increasing from $11.73T to $13.86T over the same timeframe. It is driven predominantly by mortgage loans which are 68% of all total consumer debt. Add into that $565 billion of quarterly first lien mortgage originations and you are looking at almost a 60% increase over the first quarter of 2019.
Other debt is slowly increasing as well but contributes minimally to total debt. Why is this positive? Because lending standards are strong, debt-to-income is low, and credit is good. With all of this conservative lending, loan growth is ahead of pre-crisis levels meaning more total loans and at a much better quality (i.e. lower risk). Shown below, the financial sector ETF is growing in tandem with HPI and loan growth led by mortgage lending.
What all of this means:
Credit is strong, total outstanding loans are up, yet we are in a new normal of lower yields and frequently inverting yield curves. So what do we do?
As referenced in my lending eBook, we need to be customer-first if we want to sustain loan growth without driving margins to zero in this tight environment. Again, refer to JP Morgan who in their recent earnings grew NII even while NIM was compressed. They also increased their growth of loans and grew revenue YoY by 8%. How do they sustain this and how do all of us do this quarter after quarter as we dig deeper into this “new normal”?
The 5 P’s to Customer-Centric Growth in Lending excerpt:
A customer-first approach to product and pricing is a journey. Banks and lenders that embark on it have the potential to recognize significant and sustained gains. However, like all significant initiatives, sustaining the benefits requires the ability to operationalize key processes. And data-driven technology, we believe, is a key enabler.
Imagine if we could—with precision—understand a customer’s purpose, preferences, and potential, leveraging the vast amounts of data we have at our disposal. Imagine if we could then identify the right products and the best pricing to meet their needs and our objectives. Further, imagine if we could present this to them in real time, in their moment of truth, and fulfill the offer seamlessly through back-end systems. Finally, imagine if every such pricing decision, every sales conversation, and every stage of the customer journey could be understood and correlated and used to improve future decisions, creating a flywheel of value.
Customer-centricity is key in the “new normal”
To succeed in the “new normal” we need to reevaluate how we compete. Customer-centric pricing is the key to loan growth and driving increased NII even while NIM is compressing. Don’t blame the macroeconomic environment on your compressed earnings, push into the future of customer-centric pricing and boost your loan growth way beyond your competition so you can be one of the firms that excels in the new normal instead of one that falls victim to it.
Looking for a different approach to long-term lending profitability? Download the 5 P's to Customer-Centric Lending.