CIBC: Yield Curve Will Stay Flat

The yield curve will remain flat to inverted for at least 12 more months, putting downward pressure on banking companies' earnings, according to an analyst.

Regional banks could be particularly hard hit.

"Short of a rate cut," the flat yield curve "is not going anywhere," Meredith Whitney of CIBC World Capital Markets said in an interview Friday. "Yet you listen to most bank conference calls and it's, 'The yield curve can't stay flat forever.' But, what's going to change it?"

In a report Thursday, she noted it is difficult for traditional banks to have earnings growth during a sustained yield-curve inversion. By contrast, she said, "the capital markets players have and will continue to make [money] hand over fist."

The top banking picks from CIBC, part of Canadian Imperial Bank of Commerce, are Goldman Sachs & Co., Lehman Brothers, and Morgan Stanley.

Ms. Whitney said her favorite picks among traditional banking companies are Bank of America Corp. and Wells Fargo & Co., because they are strong performers with relatively inexpensive stock prices, though she said they are not immune to margin pressure from the flat or inverted yield curve.

"I call those stocks the best houses in a bad neighborhood, because if you've got to own something, you own those," she said. "I would still own brokers over them any day in this environment."

She said spread revenue is such a large portion of most banks' income statements that few can offset the impact of the flat yield curve through other revenue sources, such as fees.

"Banks don't have a lot of recourse. You can't mitigate 50, 60, 70% of your revenue from ATM fees," she said.

Ms. Whitney said she does not expect the Fed to lower rates, because inflation remains high. Even if the Fed did reduce rates, it would take several cuts to create a more normal, sloped yield curve, she said.

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