Big Banks Geared For Higher Rates

ab051612gap.JPG

It could be a while, but large banks have set themselves up to benefit from a rebound in rates.

“Rate-sensitive” assets – or those that mature or reprice within a year – vastly outweigh “rate-sensitive” liabilities among a group of companies with more than $10 billion of assets. The net amount measured about 17% of the group’s combined assets at yearend – the highest quarterly level since at least the end of 2003, according to data from SNL Financial.

Such a makeup generally disposes banks for gains in net interest income, and the fair value of their balance sheets, when rates increase: yields on assets are poised to rise more quickly than funding costs.

The increase in the one-year “duration gap” between assets and liabilities represents a dramatic pivot. In mid-2008, when market rates were falling and the economy was approaching the most turbulent phase of the recession, short-term assets and liabilities were roughly balanced. In late 2003 and early 2004, when rates were rising as the Federal Reserve tightened monetary policy, short-term assets less short-term liabilities measured about 9% of total assets among the large bank group.

As with all measures of interest rate risk, gap analysis can be woefully imprecise, failing to capture derivative exposures, for instance.

Broadly, the data fits postures some companies say they have adopted, however.

“The impact of the low-rate environment has been absorbed,” Karen Parkhill, Comerica’s (CMA) chief financial officer, said in an earnings presentation in April. She noted that the majority of the bank’s loan book is floating-rate, and cited Comerica’s estimate that a hypothetical 200-basis-point increase in the yield curve would boost its annual net interest income by $165 million, or 10%.

Duration gaps continue to suggest liability-sensitivity at other companies, though some appear to have become less so in recent periods.

At Umpqua Holdings (UMPQ), short-term liabilities exceeded short-term assets by about $2.1 billion at yearend, a figure that represented about 18% of the company’s total assets.

Nevertheless, Umpqua estimated that a 200-basis-point increase in rates would lift its net interest income by about $5 million, or 1.3%. The company said the simulation incorporated assumptions about changes in the size of its balance sheet and the possibility that it might lag benchmarks in resetting deposit rates.

In any event, a significant increase in rates could yet be far off. Aside from a selloff after a string of surprisingly strong employment reports that lifted yields by about 40 basis points for about two weeks in late March, 10-year Treasuries have hovered at around 2% so far this year.

Meanwhile, the Federal Reserve said last month that economic weakness would likely keep it from tightening policy at least through late 2014.

For reprint and licensing requests for this article, click here.
Community banking Law and regulation
MORE FROM AMERICAN BANKER