U.S Banks - key drivers of net interet income dynamics

bank sector's asset/liability management focus on net interet income. The dynamics has a large impact on company performance as U.S Treasury curve has flattened. Banks can to some extent go after balance sheet growth (volume effect) to partly offset the negative pressure on net interet margin (rate effect). - Volume make up the lower margin 2007 Outlook still face ongoing pressure on core deposit growth. loans may not be a strong driver of interest income Overall, majority of banks were able to increase net interest income for 2006 compared to 2005. In the 3 out of 5 cases, the increased was due to large acquisitions Use leverage when top line growth is not there Banks posing lower net interest income for 2006 included U.S. Bankcorp, Washington Mutual. These banks' top line growth is low but acted aggressively in capital strategy. All of these banks engaged in large scale share repurchase in the year. Drivers of net interest income -rate and volume Interest income drivers: -Loans lead the way Especiall commerical loans (Wells Fargo, SunTrust,...), Commercial mortgages, construction, HEL and loans -loans repricing schdule, interest rates change in tandem with short-term rates. Interest expense drivers: -Felt the most pressure from rate impacts on interest expense from money market accounts and long term debt -Bigget increase in interest expense was from purchased funds including jumbo CDs, time deposites So banks walked a tight rope between satisfying their consumer depositers with higher rates, but attempting to be selective to those with larger balances or more banking relationships.