Rising interest rates were supposed to help banks. They are hurting many of them instead


Stock Market News Today


⇑⇓ Start Trading ⇓⇑


Many banks ramped up lending after the financial crisis by adding long-term, low-rate loans. Now, as they pay out more to depositors, the rates they are earning on loans are barely moving.

Overall, profit margins from lending are still rising at banks of all sizes, but at many small banks, the metric has started to go in the opposite direction. Net interest margin, which is a key profit metric, fell at nearly half of a sample of small U.S. banks in the third quarter from a year earlier, according to an analysis from investment bank FIG Partners LLC.

It is the latest sign of a growing divide between large and small financial institutions. Big banks have spent billions of dollars developing mobile apps and other technology to attract and keep customers without paying higher rates. They also added loans to their balance sheets that benefit when rates go up.

Smaller banks face a more immediate need to raise deposit rates. These banks use more of their deposits to make loans, meaning a loss of customers could jeopardize their ability to cheaply fund that lending. Their depositors often skew toward business accounts and consumers with certificates of deposit, two groups that tend to keep a close eye on rates.

The pressure to raise rates to retain deposits has become much more profound in the last six months or so, said Scott Siefers, an analyst at Sandler O’Neill.

When rates were near zero, many small banks used plentiful interest-free customer deposits to grow loans aggressively, often in the area of commercial real estate. In the process, many of these banks tacked on a record number of loans that carried low, fixed rates for long periods. The Fed moves have thrown a wrench into that approach.

Pinnacle Financial Partners Inc. more than quadrupled its assets to $24 billion over the last eight years and went on a hiring spree, enticing bankers with the promise of less bureaucracy than bigger institutions.

But in the last year, the Nashville-based bank’s profit margins from lending have started to shrink due to higher deposit costs. Its shares have given back all of their gains since Donald Trump’s 2016 election sparked a broad rally in bank stocks.

Pinnacle is trying to reverse the slide. It is hiring bankers who specialize in gathering deposits and, though it has eschewed advertisements in the past, launched a campaign to tout a money-market account paying 1.69%.

“These customer wars are new,” said Christopher Marinac, director of research at FIG Partners. “I’m not sure it gets better unless the Fed changes gears.”

Smaller banks still have above-average net interest margins, but the gap is narrowing, according to the Federal Deposit Insurance Corp. That is because bigger banks continue to benefit from the Fed raises as they tend to have more floating-rate loans such as consumer credit-card debt and corporate loans.

Banks of all sizes are grappling with slowing loan growth, while a flattening yield curve threatens to crimp the margins they earn from borrowing short term and lending longer term. Over the last three months, the KBW Nasdaq Regional Banking index is down 20%, compared with 18% for the big-bank KBW Nasdaq Bank index.

Over the last four years, New Jersey-based Investors Bancorp nearly doubled its book of loans for apartment buildings to $8 billion. Some 62% of the bank’s loans are for commercial real estate, largely in New York and New Jersey.

Rates aren’t budging on many of those loans. Commercial real-estate loans typically have fixed-rate periods from three to 10 years, a span that often got longer in recent years due to fierce competition for borrowers.

Investors Bank’s average loan yield barely rose over the last year, to 4.20% from 4.10%. Meanwhile, the rate the bank paid on interest-bearing deposits rose to 1.39% in the third quarter from 0.90% a year earlier. The bank recently hired Keefe, Bruyette & Woods to look for a potential buyer, The Wall Street Journal reported last month.

Advertisements


Categories: Stock Markets

Tags: , , , ,

7 replies

Trackbacks

  1. Large swathes of the corporate bond market are trading at a discount to face value, a dynamic not seen since the depths of the financial crisis 10 years ago – Stock Market News Today
  2. The Federal Reserve nudged up short-term interest rates for the fourth time this year, defying pressure from President Trump. – Stock Market News Today
  3. 10 Risks That Could Shake the Markets in 2019. With stock prices already under severe pressure and declining globally, one or more growing risks could intensify the downdraft. – Stock Market News Today
  4. JPMorgan to pay penalty of $135 million for misconduct that occurred between 2011 and early 2015 – Stock Market News Today
  5. Inflation: what methods can the government use to control inflation? – Stock Market News Today
  6. Best places to find free money. State treasuries and other agencies are holding more than $40 billion in unclaimed assets. Some of it could be yours. – Stock Market News Today
  7. 2019 Stress Test Scenario: Big Banks Must Show The Fed They Can Survive A Hypothetical Scenario With Enough Capital To Continue Lending – Today’s Stock Market News

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: