Shrinking profit margins can be a negative result of a lack of loan portfolio growth.
As some banks have shown over the second quarter of 2015, a stunt in loan growth can have a negative impact on profit margins.
Take Mississippi-based Trustmark, for instance, which reported a decline in 2Q 2015 earnings
as a result of narrowed profit margins. The regional financial services company's net income dropped by 7 percent from the same time last year, to $30.6 million.
As a result of the firm's 46 percent decline in interest and fees on acquired loan portfolios, net interest income consequentially tanked by 7.6 percent. The net interest margin ended up shrinking 40 basis points to 3.81 percent.
Loan Portfolio Growth Helps Improve Profit Margins for Banks
On the other hand, other banks that are beefing up their loan portfolios and participating more heavily in loan sales and acquisitions are seeing a different outcome. Case in point: Minnesota-based U.S. Bancorp.
The financial services holding company experienced its highest net interest income
ever of $2.74 billion for the last quarter of 2014, thanks to its 5 percent loan portfolio growth that year. In fact, U.S. Bancorp has been steadily growing its loan portfolio over the past few years. The company's ability to improve credit conditions also contributed to this increase in net interest income.
Recent Market Selloff Points to Prolonged Low Interest Environment
The prolonged low-interest environment has made it a challenge for investors to come by investment options that offer decent rates of return, thereby narrowing profit margins. The behavior of interest rates has continued to be a huge concern among investors.
The recent market sell-off could very well have a major effect on interest rates. China's 'Black Monday' blindsided markets across the globe, causing nervous investors to dump stocks on one of the worst trading days in years. The US stock market suffered its biggest sell-off in four years. And for the third consecutive session, the S&P 500 closed over four standard deviations
below its 50-day moving average as of August 26, 2015 - only the second time for this to occur in the index's history.
The Chinese stock market drop and the debacle across equity markets across the US could very well affect interest rates. The recent market selloff could delay decisions by central banks rate-setters about whether or not to continue the low interest rate environment.
Following 'Black Monday' in China, the US dollar was sold off at approximately 1.5 percent
relative to other competing currencies. Investors are now banking on the real possibility that interest rates will continue to be held at record lows for a longer period of time.
The recent market selloff indicates a continued low interest environment.
While rising interest rates often means that billions of dollars that banks hold in loans aren't exactly easily traded, loan portfolios are more easily sold with the perception of continued low interest rates. Any shifting of investments could signal that financial institutions are seeking protection
against the possible consequences of higher interest rates.
Loan Growth = Higher Profit Margins
Strong loan growth is a key factor to boosting net interest income for financial institutions. One of the more notable takeaways from the strong second-quarter earning report from U.S. Bancorp and other banks across the country is that a pick-up in loan volume has a huge influence on a bank's bottom line.
The boost in lending growth beefed up earnings for many of the country's top banks in the second quarter, including Wells Fargo, which recorded an increase in net income
by 3.8 percent.
Increasing Margin of Profits With Active Loan Portfolio Sales and Acquisitions
There's clearly money to be made with the sale and acquisition of loan portfolios. Banks like U.S. Bancorp have seen first-hand the profit potential that's directly related to growing loan portfolios.
By ridding balance sheets of unwanted and unprofitable loans, and adding loans with solid performances, banks can effectively increase financial flexibility and boost cash flow.
At Garnet Capital, we've been managing loan portfolio sales and acquisitions on behalf of banks large and small across the country. Our valuation and advisory services has helped our clients successfully achieve their financial goals.
Feel free to browse our white papers
to discover how the advisors at Garnet Capital can help your financial institution see its profit margins widen with a growth in loan portfolios.