Fitch: Flat Yield Curve Will Pressure U. S. Bank Margins in Second Half 2016
OREANDA-NEWS. U. S. banks will likely experience net interest margin (NIM) pressure and slower topline revenue growth from the flattening yield curve and expectations for prolonged low interest rates, according to the latest North American Financial Institutions Chart of the Month from Fitch Ratings.
When the Fed raised interest rates in December 2015, banks in Fitch's rated universe did experience some NIM expansion in Q1 2016, especially those that were notably asset sensitive. With a flat yield curve however, Fitch expects NIM expansion to decline in 2016.
"Banks may experience a boost in non-interest income as demand for residential refinance ticks up in the low rate environment; however, that will not be enough to offset pressure from the flattening yield curve," said Bain Rumohr, Director, Fitch Ratings.
In Fitch's view banks are preparing for the lower and longer interest rate environment by extending balance sheet duration. Fitch observes that loans and securities maturing or repricing more than five years out now represent 30% of total loan and securities portfolios.
"Even with gradual rate rises in the near term, if the yield curve remains on a flat trajectory, history suggests that banks will continue to see NIM compression unless there is a steep yield curve," said Julie Solar, Senior Director, Fitch Ratings.
Fitch believes there could be idiosyncratic rating implications related to rate risk but for the most part should be credit neutral for most banks. Although not expected, any significant alterations to balance sheet management strategies by individual banks, or deviation from core competencies in order to boost short-term earnings performance, could result in Fitch taking negative rating actions.
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