No Rate Hike, No Problem for Bank Earnings

Well, an interest-rate hike wouldn't have been so great anyway.

The stock market swoon over the last week has all but ended hopes that the Federal Reserve will significantly raise rates in the near term. But that should not dampen earnings expectations too much: bank analysts did not expect margins to improve even before the market rout put an end to bankers' rate dreams.

Analyst forecasts of net interest margins, based on data released before the market correction, were for increases at just 44% of banks between June 30, 2015, and yearend 2016, according to an analysis by FIG Partners released this week. FIG looked at consensus NIM estimates for 222 banks with market capitalizations of more than $150 million.

The results could help wash away the regret bankers may feel now that a rate increase appears, again, to be postponed. But FIG analyst Chris Marinac said the results jibe with what he has been hearing from bankers themselves, who say Fed policy is just one factor — and not the most important one — driving loan yields.

"Most managers have been very realistic in terms of how they view margins. They were not counting on the Fed to be their friend," Marinac said.

And "there really isn't that much benefit in the short term" from a rate rise, he said.

The Fed would need to raise rates by at least 100 basis points to have an immediate impact on NIM, Marinac said, based on his discussions with bank executives. That would be a significantly bigger jump than the gradual raise that Fed watchers expect.

However, investors may have had less realistic hopes than bank analysts. Expectations that rates would rise were a big reason banks stocks had outperformed the market in the months leading up to the correction, and investors have tried to handicap banks to identify which stocks would surge when the Fed lifts rates.

Those expectations are now out the window. New York Fed President William Dudley threw more cold water on hike hopes Wednesday, saying that raising rates is "less compelling" than it was before the market turmoil began.

The S&P 500 rallied Wednesday and was up nearly 4% in the late afternoon, but it was still down 7.5% over the past week.

FIG's analysis suggests that investors may be overstating the importance of Fed policy on banks' margins. The central bank is just one of many factors that affect margins, and for most banks it is not as important as loan mix, runoff and the rate of refinancing.

The average NIM forecast for the 222 banks was 3.48% by the end of next year, two basis points lower than at the end of the second quarter of this year.

Even for the banks that analysts expected to benefit, forecasted margin growth was pretty meager. Just 33% of banks were forecast to have NIM gains of 3 basis points or more, FIG said.

For the most part, the banks that would see bigger gains from a rate rise are larger ones, which generally hold a higher proportion of floating-rate loans than community and midsize banks. Zions Bancorp, BB&T, UMB Financial and Northern Trust were among those whose NIMs analysts expected to widen the most by the end of next year.

But rate hike or no, Marinac does not expect a sudden change in banks' fortunes.

"The fundamental trends we've been seeing for several quarters — low interest rates, yield-curve compression — really shouldn't change," he said.

The overall market rate for loans should continue to fall as higher-rate loans from a few years ago run off or get refinanced. And even if rates do go up, it will take time for banks to put all their liquidity to work, Marinac said.

Overall, Marinac is relieved that analysts do not seem to share some investors' excessive optimism about a rate rise. Bankers, too, have modest expectations for what will happen when the long awaited — and now, apparently, indefinitely delayed — rate hike finally comes, he said.

Their attitude, he said, is, "If it works out, great. If not, c'est la vie."