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Why Is Asset sensitivity Up At U.S. Banks?

A June 1st report from Credit Suisse Equity Research highlights that both large cap and mid-cap U.S. banks have become increasingly asset sensitive over the last few months, positioning them to take advantage when the Fed starts hiking interest rates later this year. CS analysts Susan Roth Katzke and colleagues say the key question is: Is this increased asset sensitivity caused by permanent or temporary factors? If the above-average non-interest bearing deposit flows that represent most of the additional asset sensitivity are only temporary, this will negatively impact the benefits they anticipate the financial institutions will see from rising interest rates.

What’s behind the boost in asset sensitivity?

Roth Katzke et al. argue that the primary causes of this quarter’s increased asset sensitivity in banks are balance sheet repositioning, an increase in variable rate loans, increased deposit flows (especially noninterest bearing deposits) and the continued aging of interest rate swaps.

U.S. Banks

Variable rate loan growth as a driver of asset sensitivity

U.S. Banks

The growth in variable rate loans has been one major driver of asset sensitivity. Loan growth lately has mainly been C&I growth, which tends to be variable rate, leading to greater asset sensitivity. Given that the variable rate nature of the loan mix puts U.S. banks in a strong position the banks well, the analysts note that  the outsized pace of non-interest bearing deposit growth bears watching as a shift in the mix from non-interest bearing to interest bearing deposits as interest rates rise would mean less benefit to asset sensitivity for banks.

Is the deposit growth permanent or temporary?

U.S. Banks

The CS team also emphasizes the above-average net inflow of non-interest bearing deposits recently to U.S. banks. Of note, non-interest bearing deposits now represent 33% of total deposits, up from 30% in the first quarter of 2012 and 22% historically for banks. They argue this appears to be “an unsustainably high level, more so in the event of rising interest rates.”

U.S. Banks

Roth Katzke and colleagues note that asset sensitivity was up at 9 of the 16 banks in their coverage universe, and declined for two. Bank of America, BB&T Corporation, Citigroup, Citizens Financial Group, KeyCorp, Regions Financial, SunTrust banks U.S. Bancorp and Zions Bancorporation all enjoyed boosts in rate sensitivity due to the factors discussed above. On the other hand, asset sensitivity went down at MTB and FITB related to LCR actions. Banks whose asset sesitivities were relatively unchanged include Comerica, Huntington Bancshares, JPMorgan, PNC Financial Services and Wells Fargo.

U.S. banks most sensitive to higher rates

The Credit Suisse analysts make the assumption that the NII lift from higher rates go straight to the bottom line, although of course, in reality, a nontrivial amount  of the revenue will likely fund incremental investment spend. Among the mid cap banks, the team believes that that the biggest boost to EPS from an up 200 bp gradual rise in interest rates would go to Comerica (29%), Zions Bancorporation (27%), and Citizens Financial Group (18%). Among the large cap banks, those with the largest percentage increase in NII in a +100 bps shift include Bank of America, JPMorgan and Citibank.

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