As we head in the final stages of preparation for Bank Innovation 2013, I cannot help but notice just how far the banking industry has come over the last two years.
This is not the same-old-same-old banking industry. I just don’t think it is possible to say that banking is “slow to innovation” or is “behind the curve.” It is just not anymore, as I have no doubt will be evidenced at Bank Innovation 2013.
The question is why? What has changed?
There are a thousand answers to these questions, but I will offer one: net interest margins. Banks are dropping NIMs like a kindergartner with soapy hands. In aggregate, banks dropped nearly 40 basis points of NIM to 3.45%, according to BankRegData.com. And what is driving this drop in margins? Lower yielding assets. The industrywide yield on earning assets in 2012 hit a 10-year low of 3.99%. Just to put that in perspective the YEA in the second quarter of 2007 was 6.82%.
Now, cost of funds is also at a 10-year low (0.54% — thank you, Mr. Bernanke), but the fact that banks can maintain even the margins they did in 2012 is noteworthy. However, we all know that cost of funds cannot go much lower — if even at all — and that means NIM compression will come out of banks’ bottom lines.
And that means banks have no choice but to innovate, to find new revenue opportunities and cost savings. It’s in the numbers, folks.
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