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The good news is that a time-honored tenet of the business of banking still holds true: no bank operates alone in a highly interdependent industry.
The Federal Reserve Open Market Committee has raised its target benchmark rate seven times since 2015. The target rate has been, raised twice so far in 2018, from a target range of 0% - 0.25% to a target of 1.75% to - 2% as of June 13, 2018, a net increase of 1.75%. For the remainder of 2018, PNC’s economists expect another quarter of a percentage point increase at the FOMC’s meeting on September 26. An additional rate hike is expected in December.
As we get deeper into the Fed’s tightening cycle, banks have less ability to “lag” their retail deposit rates and face compression on Net Interest Margins (NIMs) to the extent that yields on liabilities now start rising faster than yields on earning assets. U.S. commercial banks’ average net interest margin rose only slightly from 3.07% in 2015 to 3.32% as reported by all FDIC-insured institutions in the first quarter of 2018.
This situation can be compared to 2004 to 2006, when the FOMC imposed 10 quarterly rate hikes of 25 basis points. During that period, average, interest-bearing assets moved up 57 basis points, while the average rate paid on interest-bearing liabilities rose by 100 basis points.
For community banks, which generally have higher yielding assets but also higher cost of funds, the pressure to defend and grow margins through a rate hike cycle is more acute. Net interest income accounts for more than 80% of community banks’ net operating revenue, compared to two-thirds of revenue at non-community banks.
An optimal mix of liability-side deposit and wholesale funding sources, effective use of interest rate risk management tools, and smart portfolio management strategies are always imperatives for banks, but especially so in the current cycle when prevailing conditions create an industry treading familiar yet somewhat new terrain.
PNC’s Financial Institutions Group provides a range of solutions to assist financial institutions in improving management and positioning of their funding, liquidity, investments and interest rate risk management, as supported by specialized PNC product desk knowledge and transaction capabilities.
Challenges for banks today include raising funding at the lowest marginal cost, diversifying sources, and creating more on-balance-sheet liquidity. While bankers are familiar with traditional deposit strategies such as CD specials and money market specials, not all are aware of the opportunities in brokered funding and correspondent bank relationships. PNC offers:
With the implementation of new hedge accounting rules, which make it easier to hedge certain assets and liabilities, liquidity and investments can be managed more deftly today. In the wake of the financial crisis, regulators increasingly scrutinize on-balance-sheet liquidity as provided via the investment portfolio.
PNC offers hedge accounting support, investment performance analysis including liquidity review and liquidity/investment enhancements:
Your bank models your asset/liability position and risk exposures, from which point it can overlay potential derivatives-based interest rate risk management strategies. PNC’s Financial Institutions Group (FIG) Derivatives Product Group can help with:
With regard to these and other strategies, PNC provides competitive trade execution, strategic analysis for A/L modeling and hedge accounting support including designation at inception, on-going effectiveness testing as well as G/L reporting.
Visit us online to discover how our dedicated team of experts can help support your growth at pnc.com/fig.
This article was prepared for general information purposes only and is not intended as legal, tax or accounting advice or as a recommendation to engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in this article be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. The opinions expressed in this article are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees.
 Source: FDIC Quarterly, Quarterly Banking Profile, 2018 Volume 12, Number 2, Table I-A. Selected Indicators All FDIC-insured institutions.
 Federal Reserve Bulletin Profits and Balance Sheet Developments at U.S. Commercial Banks in 2005
 FDIC Community Banking Study December 2012
 S&P Global Research & Analysis: Deposit betas separating haves from have-nots among US banks.
 Accounting Standards Update 2017-12; Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging
 Reclassifying hedgeable securities from HTM to AFS and evaluating sale, hedge, or bond swaps to improve liquidity. BlackRock Portfolio review of the liquidity of all positions in the investment portfolio.
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