Latest 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, 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.
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In Fitch’s 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," the rating agency said in a statement.
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, the report said.
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