Garnet Capital Advisors Blog

April 11, 2014

US Banks could potentially buy loan portfolios to help bolster financial performance

U.S. banks have been facing many challenges recently that could hamper their fiscal results, and lenders in this situation might turn to buying loan portfolios in order to bolster their financial performance.

By engaging in these transactions, financial institutions can easily take on assets that provide interest-rate income. If banks have a higher demand for debt, it could easily provide loan sales with a boost.

Banks face numerous headwinds
Many have predicted that major lenders in the U.S. will report lackluster Q1 performance, according to CNN Money. Market participants have cited a wide range of potential reasons why lenders are having a hard time, including the recent difficult weather conditions.

Another challenge banks are facing is the current interest-rate environment, the media outlet reported. These borrowing costs have remained very low. While this situation gave banks substantial benefit in the last few years and helped fuel a mortgage boom, it seems to have taken a turn for the worse.

Interest rates experienced a decline during the first three months of the year, according to The Wall Street Journal. Amid this situation, banks got the short end of the stick, as the lower rates took a bite out of revenue.

Many had predicted for years that interest rates would move higher as the Federal Reserve started tapering its bond purchases, the media outlet reported. When these borrowing costs failed to increase in response to the central bank dialing back this stimulus earlier in 2014, many market participants were shocked. This development happened after last year, when rising interest rates thwarted a surge in refinances.

Falling trading revenue
The financial reports that major U.S. lenders provide for the first quarter could reveal a sharp drop in trading revenue, according to CNN Money. Bond trading was probably lower as a result of the persistence of ultra-low interest rates. In addition, commodity trading has encountered headwinds, and could stay subdued for some time as developing nations provide lackluster demand for raw materials.

Trading activity in general has been reduced sharply as a result of regulations that contain this activity. The Volcker Rule has done a lot to restrict the transactions that lenders can make.

Banks that want to make up for lost fees by purchasing loan portfolios might consider speaking with Garnet Capital Advisors, which has years of experience in this area.