Garnet Capital Advisors Blog

EXCERPT:  Interest rates continue to hover near historic lows, presenting a challenge for banks and Credit Unions to remain profitable. In this environment, banks and Credit Unions need to add high-quality loans to their portfolios.

Beefing up margins can be a struggle for lenders in the midst of the current low-interest-rate environment.

Banks and Credit Unions are feeling the brunt of the ongoing low interest rate environment which hits their bottom line.

Bank of America - the second largest bank in the nation by assets - said its Q4 2019 earnings fell 4 percent to $6.99 billion from $7.28 billion the same period the previous year, according to a recent article published in the Wall Street Journal.

The downward pressure on profits is a reflection of a drop in interest rates following a short-term period of higher rates. Last year, the Federal Reserve slashed rates three times, perpetuating the low-rate landscape banks are currently dealing with.

Thanks to its large American consumer base, the Charlotte-based bank saw better numbers between 2015 and 2018 when the Fed hiked rates nine times. During that period, the lender could charge higher interest rates to its clients without the need to drastically increase payouts to depositors.

Bank of America still managed to beat expectations on a per-share earnings basis. However, this could be attributed to a hike in share repurchases in 2019 that drove per-share results up 4 cents to 74 cents over the previous 12 months. That was a bigger increase compared to the 68 cents that was initially forecasted.  

Lower Interest Rates Can Be a Challenge For Banks and Lenders

Lower interest rates can help boost the economy by making large purchases and personal debt more affordable for consumers, thereby increasing consumer spending. But the issue for banks is that slashing their deposit rates - which are the rates that banks borrow from customers - at the same pace is not easy.  Deposit rates are at all-time lows and there is not room to go lower.

Instead, depositors may seek out another type of asset, such as stocks, bonds, or precious metals in an effort to avoid losing money in their savings accounts. In this environment, banks and Credit Unions may be hesitant to slash deposit rates below zero, as in some European banks. In turn, net interest margins continue to thin out.

Bank of America saw a dip in earnings over the last quarter in 2019, partly as a result of perpetually low interest rates.

For Bank of America, net interest income dipped 3 percent over Q4 2019 from the same time in 2018, while net interest margins decreased 17 percent over that same time period.

Despite some banks' dip in profitability stemming largely from lower interest rates, other banks seem to be more resilient. In contrast to Bank of America's recent earnings decreases, JPMorgan Chase and Citigroup both saw sizable increases in profits and revenue over the fourth quarter in 2019, mainly as a result of robust consumer operations.

What Can Banks Do to Ensure Profitability as Rates Remain Low?

One way banks and Credit Unions are dealing with low interest rates is cutting costs to keep earnings margins acceptable. But in addition to this strategy, banks would be well-advised to keep profitable assets on their loan books while ridding their portfolios of riskier, low-performing assets. Done properly, banks can still be profitable despite the low interest rate environment.

To ensure an effective strategy is put in place, banks and lenders are encouraged to partner up with a seasoned loan sale advisor that can assist in sound loan sales and acquisitions to optimize their loan portfolios. Garnet Capital is profoundly experienced in this realm and is fully committed to protecting your bottom line.

Browse white papers today to find out more about how Garnet Capital can help make your bank more profitable despite the low rates we continue to see in the industry.