Banks have enjoyed a profit boost from rising interest rates over the past couple of years. But now those higher rates could turn into a drag.


StockMarketNews.Today

 

This slideshow requires JavaScript.



The yield on the benchmark 10-year Treasury note, which is tied to commonly used mortgage rates and many other borrowing costs, recently hit a fresh seven-year high. The Federal Reserve has lifted its key policy rate three times this year, with one more increase expected in 2018. For years, as the Fed kept interest rates near zero, banks blamed superlow rates for crimping their ability to make money. Now that rates are rising, banks are finding their effect is more nuanced.

At the start of a rate-raising cycle, banks can usually raise the rates they charge on loans before raising the rates they pay on deposits. But as the rate-hiking cycle moves into its later stages, some analysts and investors are concerned about the newfound pressure that may put on bank margins, undoing some of the profit boom that followed the central bank’s rate increases over the last three years.

“The benefits of rising rates will probably run their course later this year into next year,” said Gerard Cassidy, an analyst at RBC Capital Markets. “Over time, rising rates will work against the banks.”

The rate environment is an important topic as banks begin reporting results for the July-to-September period on Oct. 12. Bank stocks have been in a funk this year. The KBW Nasdaq Bank Index is roughly flat, far underperforming the 8% rise in the S&P 500. Goldman Sachs Group Inc. and Morgan Stanley are down more than 10% this year, while Citigroup Inc. has fallen 2.7% and Wells Fargo & Co. has dropped more than 12%.

dollars

Banks, of course, are finding they can charge more for many products as rates rise. The average rate on a home-equity line has risen to 6.18% from 4.75% in December 2015, when the Fed began the rate-raising cycle, according to Bankrate.com, a personal finance website. The average rate on a credit card rose to 17.4% from 15.78%. The refinancing business, which buoyed banks in the years after the financial crisis, is perhaps most vulnerable to rising rates. Mortgage origination volume is expected to fall 6% this year, driven by a 24% drop in refis, according to the Mortgage Bankers Association.

Advertisements