NEW YORK--(BUSINESS WIRE)--Now that the Fed has maintained its near-zero target rate, most U.S. banks will remain very attentive to their cost structures given the expectation of flat to lower asset yields going forward, says Fitch Ratings. Moreover, Fitch expects many highly asset-sensitive banks to trim their asset sensitivity in order to potentially protect net interest income from further downward pressure.
With the Fed's decision yesterday to maintain a target range of 0% to 0.25%, we believe the banking industry will seek to find even greater operating efficiencies in the near to intermediate term. While many banks have already laid out and executed cost-cutting initiatives, we anticipate further efforts in reducing operating costs and improving operating leverage. We believe many banks were counting on a rate lift-off in order to marginally improve net interest income, and thus, positively affect key earnings metrics such as the efficiency ratio. With the Fed maintaining its near-zero target for the near term, additional efficiency measures are likely to be examined.
We also anticipate many asset-sensitive banks to take actions to trim their sensitivity to guard against further pressure on net interest margins (NIMs) and overall revenue. Public disclosures on banks' sensitivity to interest rates is commonly evaluated in the context of 100 bps or 200 bps parallel shifts in the yield curve. We note that most banks have disclosed that an increase in rates would be of benefit to net interest income. A few banks in our rated universe project double-digit percentage growth in NIM in an environment where rates increase 200 bps based on their modeling assumptions. Now that rates are likely to be lower for longer, we expect those highly asset-sensitive banks to reinvest incoming cash flows further out on the rate curve, reducing asset sensitivity.
We continue to believe that predictions of what will happen following a rate increase by the Fed are complicated by how banks will aim to retain core deposits under the new liquidity coverage ratio rules. Other factors that may prove influential include a potentially faster velocity of money given the rise of Internet banking, impact of money market reform and whether the federal funds market revives under the regime where the Fed pays interest on banks' reserves.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.