Cultivating Low Net Interest Margin

 | Sep 03, 2013 | 4:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:
















Last week, I wrote about the banks with the highest net interest margin (NIM), which are the ones concentrated in the credit-card business. In this column, I'll discuss the two banks with the lowest NIM: investment banks Goldman Sachs (GS) and Morgan Stanley (MS). 

Goldman Sachs and Morgan Stanley have by far the lowest net interest margins of all banks at 0.80% and 0.87%, respectively. To put this in context the next lowest NIM among all publicly traded banks is at Bank of New York Mellon (BK) at 1.08%. The money centers, JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) have NIM's of 2.40%, 3.46%, 3.35%, and 3.50%, respectively.

Why are the margins at Goldman Sachs and Morgan Stanley so low? And why is this important to investors?

In September of 2008, after Lehman Brothers failed, the Federal Reserve allowed Goldman Sachs and Morgan Stanley to become bank holding companies and as a result become part of the Federal Reserve system. This afforded them access to capital, if necessary, directly from the Federal Reserve's discount window, purchasing fed funds from other banks, and by accepting bank deposits from retail customers.

The discount rate is the rate the Fed charges banks needing capital to meet liquidity requirements that they can't access either from other banks or from depositors. In the five years since Goldman Sachs and Morgan Stanley were allowed to become bank holding companies, they have accessed deposits from retail investors by buying them from brokers instead of the traditional route of building a branch network.

By doing so, their upfront costs to build a traditional bank are mitigated but they must increase their carry costs by offering deposit rates above those of traditional banks. About 60% of Goldman's deposits are brokered; at Morgan Stanley, it's 99%. This strategy has worked however and is very favorable in a low rate environment. Goldman's retail deposits in the past 3 years have doubled from about $32 billion to $65 billion; while at Morgan Stanley the increase has been about 33%, from $60 billion to $80 billion.

Because short-term interest rates have been down over that entire period, both organizations have been able to hold funding costs to about 0.55% annually. That's a very attractive rate for borrowing funds, but it's also twice the funding rate at Wells Fargo and Bank of America (which are about 0.25 each), and about 60% more than at JPMorgan Chase (which is about 0.35%).

Both Goldman Sachs and Morgan Stanley have been able to absorb the higher cost of accessing deposits and the lower earned interest margin associated with it by maintaining tight underwriting, low loan losses, and concentrating on trading for an increased share of earnings. Both organizations actually earn more income through activities other than interest earned on loans made and serviced.

But they have both also grown their loan business substantially since becoming banks. Goldman's book of loans has quadrupled in the past three years from about $4 billion to $16 billion. Morgan's loan book has almost tripled over the same time frame, increasing from about $12 billion to $32 billion.

Both organizations are investing a lot of time and resources into growing a very conservative and low-profit lending business. I don't know why either of them is doing this or what their future plans are.

The bottom line for both organizations is that their cost of capital is higher and their return on the loans made with them is lower than other banks. Although that margin is still positive, it is very low in comparison to the rest of the banking industry.

Although this information doesn't provide anything actionable for investors , it is worth being aware of as the business strategy is odd.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
View Chart »  View in New Window » View Chart » 
Hug declines in Advance Auto Parts (AAP) and Dick's Sporting Goods (DKS) made for great chances to buy stock a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.