Daily Management Review

Low-Rates & ‘Flatter Yield-Curve’ Challenge Financial Institutions


07/19/2016


The long-term low rates worry the U.S. Banks.



Amid the preparation of mortgage bankers for “a historic boom” to have reached its end thanks to the “low interest rates”, the borrowers too have started to knock at bankers’ door once again.
 
According to last week’s earnings reports:
“...JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N) and Citigroup Inc (C.N) said they originated $94 billion worth of new mortgages during the second quarter in their core mortgage operations, an increase of $23 billion, or 31 percent, over the first quarter”.
 
The rates of mortgages have touched their lowest bay ever since the year of 2013, following the “dashed expectations” of the “U.S. Federal Reserve” for rate hikes. Likewise, borrowers tried to seal the deal at “better rates”, while the new ones have got attracted to “low borrowing costs and low down-payment offers”.
 
The predictions say that the trend is likely to continue the same by providing “a bright spot in a low-rate environment”, which would in turn hammer their “wider results”. Over a thousand employees at JPMorgan will be manoeuvring the mortgage business tide this year. The C.E.O of mortgage banking at JPMorgan, Mike Weinbach, reports Reuters, “believes U.S. lenders will make about $1.8 trillion of mortgage loans this year, 40 percent more than he had expected at the start of the year”.
 
In Weinbach’s words:
"We thought the refinance market was going to shrink sharply. We've seen a market that has been much bigger than expected."
 
The big lenders will not welcome the situation as they rely on rate hikes to improve their profit margin. However, low rates create “new mortgage business” besides delivering “fees from refinancing”, while banks are put in a tight corner for generating “substantial income when rates fall too low”. The pressure gets more intense with the U.S banks as their funding cost has also shot up.
 
As per Reuters report:
“At some point, there is little room left between what it costs banks to obtain funds and what they can earn from lending and investing. Rates on short- and long-term debt – known as the yield curve – have come closer together, leaving banks with razor thin margins almost regardless of the type of funding or loans they pursue”.
 
Wells Fargo’s Chief Financial Officer, John Shrewsberry, said:
"The headwinds from a flatter yield curve and a lower-for-longer rate environment creates challenges for all financial institutions”.
 
Citigroup, Wells Fargo and JPMorgan, all seem to be on the same page with “low rates” which becomes the main difficulty in terms of performing better. Fred Cannon, an analyst at KBW, stated:
"While the rate situation is challenging, there are a few silver linings in the clouds”.
 
 


References:
http://www.reuters.com/







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