OREANDA-NEWS. U.S. trust and processing banks may see a pickup in earnings when short-term interest rates rise, says Fitch Ratings.

U.S trust banks, including Bank of New York Mellon, State Street Corporation, Northern Trust Corporation, and Brown Brothers Harriman are highly sensitive to higher short-term rates given large and relatively short-duration securities portfolios.

'A pick-up in net interest income and lower fee waivers on money market funds would drop almost directly to the bottom line if, or when, securities are reinvested at higher rates,' says Justin Fuller, Senior Director, Financial Institutions.

Trust bank earnings have been constrained in recent years as low interest rates took their toll on asset yields and spreads in the securities lending business. Lower volatility seen prior to first half 2015 was also a constraint on foreign exchange revenue.

As a result, the focus has shifted to managing expenses. While Fitch believes that these institutions have done a good job of reducing headcount and streamlining operations through technology investments, savings have been offset by higher compliance and regulatory related expenses.

Despite these challenges, trust banks have a strong business model, resulting in some of the highest ratings for financial institutions globally in Fitch's portfolio. Large barriers to entry including high fixed costs, sticky customer relationships, and low marginal costs have created large economies of scale, and therefore driven consolidation into a few large players that dominate the industry.

Fitch recently affirmed the ratings and maintained the Stable Rating Outlook on all U.S. trust and processing banks, reflecting the strong business model, comparatively low-risk balance sheets, good capital ratios, and strong liquidity positions.