Will Rate Hike Secure Steady Growth For U.S. Banks?

It’s common knowledge that financial companies thrive in a rising interest rate environment. Therefore, U.S. banks will undoubtedly get a boost from the impending rate hike by the Federal Reserve. This, along with the fundamental strength earned by banks since the last financial crisis, should help them reach the turning point of consistent growth.

The likely interest rates hike, though at a slower pace, will ease some pressure on net interest margin (NIM) – a key source of banks’ earnings. Also, banks will earn more from the money that they need to keep at the Fed compared with almost no income from this source in a near-zero rate environment that has prevailed since the last financial meltdown.  

  On the other hand, aggressive actions have paired up with defensive measures like expense control to make banks win over persistent challenges. Moreover, banks have earned the ability to deal with crises. They can now dodge pressures from the operating environment more easily.

In terms of fundamentals, along with strategic changes in the business model and a deeper focus on boosting profitability, balance sheet recovery and expense management hold the keys to success.

(Check out our latest U.S. Banks Stock Outlook for a more detailed discussion on the fundamental trends and the position of this important sector from an earnings perspective.)

Deeper Focus on Balance Sheet Right-Sizing

The lack of low-risk investment opportunities for Americans has so far aided banks in significantly growing deposits. In fact, banks have so much excess deposits now that they don’t have to competitively increase rate to attract new deposits for quite some time.