December 8, 2014 / 7:13 PM / 3 years ago

Fitch: Sustained Short-Term Rate Rise Would Aid US Banks

(The following statement was released by the rating agency) CHICAGO, December 08 (Fitch) Last Friday's jump in short-term Treasury rates, triggered by the US Labor Department's much better than expected November employment report, could be a positive development for those banks with loans closely tied to short-term interest rates (or asset sensitive banks), says Fitch Ratings. A sustained increase in short-term rates, as opposed to a steepening of the yield curve, has been a missing competent of many of the rate stories since the beginning of the Fed's third round of quantitative easing. In our view, increases in rate benchmarks such as Fed Funds and LIBOR are needed to usher in any expansion in net interest margins (NIM). Given that the banking industry's average net exposure on the yield curve is much shorter than it was a decade ago, short-term rates are particularly important to our views. Stronger NIMs would be a positive for bank profitability. In particular, trust banks could be aided by a rising short-term rate scenario as these banks have maintained short durations on their sizable securities portfolios and would therefore more quickly benefit from higher reinvestment rates. Strong job-creation numbers could also be a major signal of a more complete economic recovery and further expansion, potentially sustaining the strong asset quality of many US banks into 2015. As the Fed determines the timing and magnitude of rate increases, the November employment report may be an important indicator for its evaluations. A rise in short-term rates could spark competition among banks for retaining deposits, as more retail and commercial depositors begin to rate shop for returns. Moreover, Fitch believes that a modest rise in short-term rates is likely to result in noninterest-bearing deposits shifting to higher-cost deposit products. This is a potentially costly side effect of rising rates and would dampen any potential NIM improvements. If the Fed views the economy as growing more quickly, it may result in sharper rate hikes by the central bank, and that could lead to more mixed impacts for banks. Wider differences between the yields on US banks' interest-bearing deposits and money market funds could also drive deposit outflows after the Fed begins hiking rates. Still, Fitch believes that many banks remain flush with deposits and could sustain modest depositor outflows through 2015 without any significant liquidity implications. Furthermore, rapidly rising rates (more so for the long end of the curve) would likely not be as welcome news for banks with larger securities portfolios. The size of investment portfolios across the banking sector, particularly for larger banks, has generally grown in the recent past, relative to total assets growth. Banks with greater than $250 billion in consolidated assets must include the impact of unearned gains and losses from available for sale portfolios in regulatory capital calculations under Basel III rules. No matter what size, all banks' tangible capital ratios would be adversely impacted by a rapid rise in long-term rates, such as experienced in the late spring of 2013. Contact: Bain K. Rumohr, CFA Director Financial Institutions +1 312 368-3153 70 W. Madison Chicago, IL Matthew Noll, CFA Senior Director Financial Institutions - Fitch Wire +1 212 908-0652 33 Whitehall St New York, NY The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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