Statistics can be helpful, especially when you have the history and commentary to see trends and impacts. Understand the metrics included in our banking industry benchmarks key performance indicator (KPI) report more thoroughly with our insight into some of the current KPIs.
Return on average equity/yield on earning assets
Key indicators of bank profitability demonstrated modest improvement during the third quarter of 2017 in comparison to the previous quarter. Most notably, return on average equity (ROAE) increased to 9.59 percent from 8.91 percent, and yield on earning assets increased to 4.26 percent from 4.18 percent. Although these increases do not reflect a significant acceleration in the earnings curve for the banking industry, the driving factors behind this favorable movement reflects potential notable changes that may have a longer lasting effect on these indicators.
Tier 1 capital
It appears the favorable view of banks since the beginning of the year has enabled many organizations to measurably improve their capital structures. Ready access to more equity capital has enabled many banks to reduce the dependency on higher costing capital and more efficiently allocate capital to profitable activities. In addition, the healthy mergers and acquisitions (M&A) environment has provided for the combination of banking organizations resulting in a much more efficient use of capital, driven in large part by the ability to spread the increasing costs of bank operations and compliance over a broader base of assets.
We also note an improvement in the efficiency ratio. Although not yet fully evident, there appears to be some possibility that banks have caught up with the increased regulatory burden that evolved over the past five to seven years. They are now measurably more efficient in supporting revenue generating activities. Although there is still much to be done in these areas, this improvement appears to be due in part to improved management of the regulatory compliance framework, enhanced use of technology and the completion of retrospective activities associated the matters originating during the credit crisis.
Net interest margins
Notwithstanding a modest increase in interest rates driven by the Federal Reserve’s recent actions, banks do not appear to be experiencing increased costs of deposits. Accordingly, as loans and other earning assets have repriced upward, banks have seen a modest increase in net interest margin to 3.78 percent in the most recent quarter from 3.73 percent in the second quarter of 2017. Few banks have experienced notable efforts by competitors increasing deposit rates to entice depositors to move certificates of deposit or other interest-earning accounts. Some evidence is emerging that suggest this reduced importance by depositors on interest rates reflects changing demographics in the primary customer bases. This includes a relative increase in Millennials who tend to be service and feature focused in selecting banking relationships. Compare this to retirees and Baby Boomers who generally have been more likely to move accounts for higher interest rates.
Overall, the third quarter metrics indicate banks are effectively managing the earnings model across an ever-changing landscape.
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