Aided by core deposits and absolute level of interest rates, banks are more asset sensitive now than they were during the 2004-2006 interest rate hike cycle, notes Sterne Agee.
Brett Rabatin and Jonathan Craycraft of Sterne Agee in their research report dated October 7, 2014 titled: “Asset Sensitivity-A Look Back at History, and Some Concerns We Have With 10-Q Modeling” express their concern that deposit costs may not lag interest rates as much as banks hope.
Interest movement Vs NII
After analyzing the interest rate cycle during 2004 to 2006, the Sterne Agee analysts note that NIM for banks between $5 billion and $20 billion actually declined 20 bp on average during the last cycle. The analysts believe banks are more interest sensitive now considering greater core deposits and the absolute level of interest rates.
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However, the analysts throw light on the extent to which Net Interest Margin and Net Interest Income will benefit from higher interest rates. The following table highlights the estimated annual increase in NII for a 200 bps move in interest rates:
The following table sets forth the NIM sensitivity to Federal funds rate movement:
Banks’ asset sensitivity: Cost of funds Vs Interest rate
Rabatin and Craycraft point out that most of the banks that they spoke with believe they will be able to lag deposit costs into a higher rate environment. However, as can be deduced from the following graph, once interest rates began moving higher in earnest in early 2005, deposit rates also started moving higher, except for SVB Financial Group (NASDAQ:SIVB).
The Sterne Agee analysts think there is clear benefit from C&I loans re-pricing higher, but they wonder if some banks are being aggressive with NII modeling with higher interest rates.
The analysts single out SVB Financial Group (NASDAQ:SIVB) as the real “pure play” for higher interest rates, which oddly from a 10-Q sensitivity analysis perspective lags Texas Capital Bancshares Inc.
The following table captures asset sensitivity sorted by greatest impact of 200 bp to NII:
Rabatin and Craycraft also believe East West Bancorp, Inc is being under-recognized relative to peers on the potential for higher rates. The analysts think consensus is likely to rise even without higher rates. They also believe in the growth model of Texas Capital Bancshares Inc (NASDAQ:TCBI) and anticipate 3Q14 earnings may exceed expectations, though they believe the NII sensitivity modeling in the filings may be aggressive.