While the U.S. Federal Reserve Bank seems content to hold interest rates “lower for longer,” U.S. banks are not as happy. The longer the Fed keeps interest rates low, the tighter the squeeze on the banks’ profits.
In a new report published Friday, Fitch Ratings says that banks will continue to focus on controlling costs and improving operating efficiencies in their battle to beef up margins until the Fed raises short-term lending rates.
According to the Fitch analysts, bank margins fell to 3.02% in the first quarter of this year, the lowest average net interest margin (NIM) since 1984. Fitch analysts go on:
The vast majority of the banks within Fitch’s rating universe continue to disclose that they are asset-sensitive, meaning when rates rise, so does net interest income, as assets reprice faster than liabilities. However, many asset-sensitivity disclosures assume a 100-bps or 200-bps parallel increase in rates. Thus, a very gradual rate rise coupled with longer term rates remaining stable would make it unlikely for many US banks to see any meaningful NIM improvement over the near to immediate term.
In other words, a rate hike of 0.25% is not a lot of short-term help. And if the Fed pushes out further rate hikes at that same level at the rate of just one or two per year, banks’ profit margins are not going to get well any time soon. Or, as Fitch puts it:
In general, banks have extended balance sheet duration in this protracted low rate environment. Loans and securities maturing or repricing in greater than five years relative to total loan and securities portfolios have increased to nearly 30% from 25%. This shows a fairly clear strategy by some management teams to extend duration to augment asset yields as expectations turn to a lower rate environment well into 2016.
At least Fitch does not expect significant ratings changes due to interest rate risk. Bankers can take at least some comfort in that.
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