Academic journal article ABA Banking Journal

Margin Squeeze and the Search for Yield

Academic journal article ABA Banking Journal

Margin Squeeze and the Search for Yield

Article excerpt

Margin pressure is unlikely to abate for banks as loan growth remains relatively weak, interest rates continue to be low, and banks still hold sizable amounts of lower-yielding securities on their balance sheets, according to an analysis by SNL Financial writers Harish Mall and Nathan Stovall, on ababj.com.

Banks have relied on their securities portfolios for earnings in recent years, and increasingly have sought out higher-yielding credit products and, in particular, municipal bonds to bolster earnings. The low-rate environment has caused banks to purchase new securities at lower yields. This, combined with lackluster loan growth and high levels of cash balances, has led to margin pressure.

Securities totaled 20.35% of assets at the end of the fourth quarter, while loans totaled just 61.22% of assets. Three years ago, loans comprised 67.65% of assets and securities totaled just 16.60%, according to SNL data. Banks with high balances of securities face the possibility of interest-rate risk in their investment portfolios when rates eventually rise, write Mall and Stovall. Rates increased modestly during the fourth quarter, which caused some banks to take advantage of what gains they had in their portfolios. …

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