Like a coiled spring ready to burst forward, financials/banks have been anxiously awaiting a rising rate environment for over a decade. Banks can now charge much higher rates on credit than they pay customers on deposits. Banks generate a high percentage of their earnings from interest rates, especially ones who do not benefit from asset management fees, trading revenue or investment banking.
ZIRP compressed spreads (the amount of interest charged minus the amount paid out) for a protracted time period. In a rising rate environment, banks are seeing their profitability improve.
Banks also collect interest on cash sitting in bank accounts, along with their customers. Investors stockpiling cash during market volatility will put money into bank deposit, money market and cash-equivalents. Financials that offer money market funds and other cash deposit products have had to waive fees on these products for a decade or more just to pay out “some” interest to their customers. Now, net interest revenue from the cash in bank and money market funds is soaring.
Prepayments on MBS have slowed tremendously, too, with the rise in interest rates. For banks that have large mortgage-backed portfolios, the pullback in prepayments dramatically lessens the compression on margins.
I don't buy the idea that YC shape has a large effect on NIM. Banks take very little duration risk. They swap LT fixed rate funding back to floating and don't lend at fixed rates. Fixed mortgages are securitized to get them off the banks' balance sheets. Duration risk as a mainstay of bank balance sheets died along with the S&Ls.
Like a coiled spring ready to burst forward, financials/banks have been anxiously awaiting a rising rate environment for over a decade. Banks can now charge much higher rates on credit than they pay customers on deposits. Banks generate a high percentage of their earnings from interest rates, especially ones who do not benefit from asset management fees, trading revenue or investment banking.
ZIRP compressed spreads (the amount of interest charged minus the amount paid out) for a protracted time period. In a rising rate environment, banks are seeing their profitability improve.
Banks also collect interest on cash sitting in bank accounts, along with their customers. Investors stockpiling cash during market volatility will put money into bank deposit, money market and cash-equivalents. Financials that offer money market funds and other cash deposit products have had to waive fees on these products for a decade or more just to pay out “some” interest to their customers. Now, net interest revenue from the cash in bank and money market funds is soaring.
Prepayments on MBS have slowed tremendously, too, with the rise in interest rates. For banks that have large mortgage-backed portfolios, the pullback in prepayments dramatically lessens the compression on margins.
I don't buy the idea that YC shape has a large effect on NIM. Banks take very little duration risk. They swap LT fixed rate funding back to floating and don't lend at fixed rates. Fixed mortgages are securitized to get them off the banks' balance sheets. Duration risk as a mainstay of bank balance sheets died along with the S&Ls.