As you know (all too well) banks raise interest rates on loans well before doing so on deposits. Because of that, we expect to see increased profits and interest margins in second quarter bank call reports. Third quarter could be another story altogether.
Jumbo Rate News subscribers have already begun to see an upward move in deposit interest rates. That should have a much larger effect by the end of September as more banks climb on board. As they do so, we will continue to analyze the impact rising rates have on both net interest margins (NIM) and overall liquidity. There can be substantial fluctuations in these measures due to each bank’s business model and size.
In its Quarterly Banking Profile for the first quarter, the FDIC reported that the industry NIM of 2.54% was down 1 basis point from year-end ’21 and well below the pre-pandemic average of 3.25%. That, as the cost of deposits was at a record low of 0.16% at March 31, 2022. This is about to change.
As always, banks designated as credit card banks reported the highest NIM (10.68%) at March 31st. International Banks typically fall at the bottom of the NIM range as do other banks with assets exceeding $1 billion. First quarter 2022 was no different. The average NIMs on these groups calculated to 1.92% and 2.14%, respectively.
Mortgage lenders had the next lowest NIM at 2.25% as droves of consumers took advantage of low refinance and purchase rates. If not managed properly, these long-term loans could come back to haunt some banks. With higher capital levels and tighter regulations, we don’t anticipate any immediate concerns. That being said, every cycle is unique and it has literally been decades since rates have risen so rapidly.
The NIM is a biggie, but it is not the only place stress fractures can appear. The loan to deposit ratio (LTD) plays a vital role in how rate swings affect a bank. When loans earn more than the cost of deposits, a higher LTD is great. However, as the pendulum swings in the other direction, a high LTD can bring rise to negative consequences. Again, this also depends largely on the bank’s business model.
Aside from most credit card banks, Bauer typically considers an optimal LTD to be between 80%-90%. As a general rule, a bank lending at this level is lending sufficiently to meet the needs of its community but not so much that will be unable to meet its other obligations, even in the event of a change in the interest rate environment.
Because credit cards have higher interest rates than most other loans, banks that specialize in credit cards can (and usually do) have much higher LTDs... and they are more profitable because of it. But there are only eleven banks characterized specifically as credit card banks.
As we have demonstrated, the NIM and LTD go hand-in-hand. But there are many other factors to consider when rates are changing rapidly. Two that are always at the forefront are:
What type of capital cushion does the bank have to protect itself against losses?
What is the quality of the bank’s loan portfolio?
These can be “make-it or break-it” questions in the best of times, but especially in times of stress.
Fortunately, the nation’s banks are currently quite strong. The industrywide leverage capital ratio (CR) at March 31st was 8.67%, while total and tier-1 risk-based CRs were 15.04% and 13.74%, respectively. Noncurrent assets plus other real estate owned (OREO) is just 0.44% of total assets.
Removing the Big Banks from the equation, the leverage CR at the nation’s community banks is 10.14% and the ratio of noncurrent assets + OREO is only 0.38%. We are definitely starting from a position of strength.
That being said, the 49 banks listed on page 7 are all rated less than 5-Stars. They also each reported:
Brokered deposits greater than or equal to 30% of total deposits and/or
Noncore funding dependence that is greater than or equal to 30%.
These funding sources may not be readily available in times of stress. However, many of the banks listed have special
These funding sources may not be readily available in times of stress. However, many of the banks listed have special circumstances. Four are credit card banks. Several others are special purpose banks (ie. Toyota Financial and BMW Bank). Former JRN listee 2-Star Luana SB, IA and 2-Star Lincoln 1st Bank, NJ are the only two currently on Bauer’s Troubled and Problematic Bank Report.