As they face a prolonged low interest rate environment, U.S. banks are likely going to undergo more balance sheet restructuring in the months ahead, says Fitch Ratings in a new report.
The rating agency says that the long period of low rates continues to pressure the banks’ net interest margins and investment yields. “Absent a near-term increase in rates, which now appears less likely given the Federal Reserve’s ongoing commitment to accommodative monetary policy and a weakening global macro outlook, we believe U.S. banks will continue to face challenges in generating spread income and improving margins as Treasury yields remain near historic lows,” it says.
And, given the tepid economic recovery, many banks have excess liquidity, it notes, since corporate loan growth continues to be modest. As a result, Fitch expects that many institutions, particularly larger banks with substantial amounts of excess liquidity, will be reviewing their investment strategies carefully.
“Many banks may have developed investment strategies during the 2007-2010 period that rested on the assumption that interest rates would rise, in step with a cyclical recovery in economic activity and loan demand,” it says. “As yields have fallen and hopes for a healthy global recovery have dimmed, we believe some institutions are likely to undertake broader balance sheet restructuring, increasing exposure to higher-yielding securities, potentially including corporates, [mortgage backed securities and collateralized loan obligations].”
“We expect many banks to take a closer look at asset allocation in their investment securities portfolios moving into the third quarter. As second-quarter bank earnings season kicks off, we expect to focus carefully on changes in the composition of bank investments, as well as possible guidance from management on future strategies to cope with the negative fall-out from persistently low interest rates,” it adds.