The solid support that cost containment efforts are lending to U.S. banks are being marred by lack of top-line growth and the ever-increasing need to spend more on cyber security and alternative business opportunities.
A dearth of overall loan growth and consequent pressure on net interest margin remains prominent with the persistent low interest rate environment, liquidity coverage rule (LCR) requirements and intense competition.
In an earlier piece (U.S. Bank Stocks with Growth Potential), we provided the favorable arguments for investing in the U.S. banks space. But we would like to argue the opposite case in this piece to help you make the right call.
All Will Not Be Good with the Interest Rate Hike
Low rates are forcing banks to cut interest expenses and ease underwriting standards. This is, in turn, increasing the chance of higher credit costs. Further, shifting assets to longer maturities — the only course to strengthen net interest margin — doesn’t look appropriate now, as the expected increase in interest rates by mid 2015 could backfire.
On the other hand, the persistent low-interest-rate environment is having a mixed impact on banks. While it reduced their borrowing costs, limitation to charge high interest on loans hurt revenues. When interest rates finally start rising, benefits of banks will depend on their ability to charge more for loans than what is paid on deposits.