Magazine article American Banker

Rising Rates Hitting Thrifts Harder Than Banks

Magazine article American Banker

Rising Rates Hitting Thrifts Harder Than Banks

Article excerpt

Over the last three months, interest rates have been pushed up steadily by the Fed. Key rates, like the federal funds rate and the prime rate, have increased 125 to 150 basis points. Other rates have increased in varying degrees.

How does this affect the profitability of banks and thrifts? Although the answer to this question depends on a host of individual factors, we can note some general trends.

First, banks and thrifts are affected somewhat differently by rising interest rates. While the two have become more alike over the past several years, there still remain critical differences in their revenue sources.

Thrifts, by nature, continue to be heavily oriented toward residential mortgage products. Some, of course, have branched out into consumer and commercial lending but their balance sheets remain dominated by one- to four-family residential loans and securities backed by pools of mortgages.

As mortgage rates have risen, thrifts' main business activity has slowed, decreasing asset generation and fee income. Existing fixed-rate mortgages become less valuable as the deposit funding costs increase. Adjustable-rate mortgages take time to reprice to market rates, especially if they were booked at artificially low "teaser" rates.

Banks, on the other hand, have more diversified revenue sources. The majority have a substantial portion of their balance sheet in commercial loans. Most commercial loans are variable rate and can immediately reprice as the prime rate rises.

Additionally, most banks have some volume of fixed-rate consumer loans. …

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