Major U.S. Banks Showing Different Trends Compared to Domestic Ones

[Asia Economy Reporter Song Hwajeong] The performance indicators of major U.S. banks have shown a different trend compared to those of large domestic bank holding companies. The net interest margin (NIM) is declining, and provisions have already entered a reversal cycle.

According to Hanwha Investment & Securities on the 31st, the average NIM of six major U.S. banks?JP Morgan, Bank of America (BoA), Citibank, Wells Fargo, US Bancorp, and PNC Financial Services?was 2.00% in the fourth quarter of last year, down 9 basis points from the same period the previous year, continuing a downward trend. The quarterly average NIM of these six banks fell from 2.7% in 2019 to 2.26% in 2020 and 2.01% last year.

Kim Doha, a researcher at Hanwha Investment & Securities, analyzed, "Despite rising interest rates and loan asset growth, the main cause of margin deterioration lies in the mismatch between assets and liabilities." He added, "Due to increased deposit demand after the pandemic, the deposit balances of the six banks increased by an average of 4.0% quarter-on-quarter from Q1 2020 to Q4 2021, with cost-bearing deposits excluding demand deposits rising by 5.7%, while loans increased by only 0.2% on average during the same period." As a result, the NIM of the six banks declined more steeply than the net interest spread (NIS), and net interest income actually decreased until Q1 last year.

In contrast, the four major Korean bank holding companies?KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?showed similar deposit and loan growth rates of 2.5% and 2.6% quarter-on-quarter, respectively, with rising NIS, resulting in meaningful growth in interest income.

Provisions have shown a reversal trend after large-scale additions. Major U.S. banks proactively built up large provisions in the early stages of the COVID-19 outbreak in Q1 and Q2 2020. JP Morgan recognized $10.5 billion (approximately 12.8 trillion KRW) in loan loss expenses in Q2 2020 alone. After the large-scale provision additions, a significant reversal began in Q1 last year. Researcher Kim explained, "The combined provisions of the six banks recorded $67.4 billion in 2020 but showed -$23.7 billion last year." He added, "To remove the rebound effect from proactive additions, the quarterly average provisions from Q1 2020 to Q4 2021 were $5.5 billion for the six banks combined, similar to the 2019 quarterly average of $5.6 billion."

The four major Korean bank holding companies recorded a net provision addition of 834 billion KRW on a quarterly average from Q1 2020 to Q3 2021, which is 21% higher than the 2019 quarterly average. Additionally, financial authorities required extra provisions equivalent to stress tests to be reflected in Q4 last year's results, so the provision growth rate is expected to increase further.

Domestic banks' NIM is expected to remain strong until the first half of this year, with the timing of provision reversals projected for 2023. Researcher Kim stated, "Considering the interest rate trend, the NIM of large Korean banks will show a significant increase in the first half of this year." He added, "The conservative provisioning of loan losses over the past two years will limit credit risk, but considering that actual delinquencies will occur from May this year, provision reversals within this year are considered premature." He further noted, "If the severity of defaults is lower than the provisions made, reversals will be possible starting in 2023."

This content was produced with the assistance of AI translation services.