Margin Pressure Expected to Persist this Year.

OLDWICK, NJ -- Analysts at A.M. Best predict that the banking industry will find it difficult to increase net interest margins this year, even if the Fed holds off on further interest rate increases.

With loan losses creeping up, "erratic performance" of trading income at large institutions and increased competition for both deposits and loans are conspiring to keep the cost of funds high and asset yields low. Moreover, residential mortgage lending may continue to lose steam as an earnings driver for banks, according to the report.

And those trends will persist for banks that hold mortgage assets and other loan products on their books, A.M. Best predicts.

The banking analytics firm notes that while the banking industry remained strongly profitable in the third quarter, the number of banks reporting gains in earnings has declined steadily since peaking in the summer of 2005, A.M. Best said.

The report goes on to say that "underlying shifts in the balance sheet mix and operating statements of U.S. banks suggest a trend toward higher levels of credit and interest rate risk in various segments in the industry."

So far, banks have managed the net interest margin contraction well, benefiting from stable economic conditions and their ability to draw down loss reserves and boost fee income.

A.M. Best said the industry continued to experience loan growth related to real estate, but the balance was shifting more toward commercial lending than consumer lending. Industrywide, loan ...