Interest Rates and Inflation Cause Uncertainty for Banks – BizWest

Rising interest rates, inflation and labor shortages are just some of the challenges currently facing banks, although net interest margins continue to hold at an average of 3.06. % for state-insured institutions as of June 30, 2022, which is a slight drop of 3.09% as of June 30, 2021.

The net interest margin, which is the main driver of bank profitability and income, will eventually tighten, probably in the course of next year, said Gerard Nalezny, president of Verus Commercial Bank.

He suspects bank net interest margins, which remained strong in the third quarter, will stabilize in the fourth quarter and decline and then rebound in the first quarter of 2023.

“It depends on deposit rates rising, compressing and lending rates rising to compensate. There is always a little disconnect in things,” he said.

Waller

“We are in a rising rate environment, and it looks like that will continue for some time as the Fed tries to get inflation under control. We will continue to see this for a while,” said Jennifer Waller, CEO of Colorado Bankers Association. “On the positive side, banks came into the pandemic very strongly in 2020, savings rates were very high for the businesses we serve, bank capital ratios were very strong and remained strong throughout the pandemic.”

At first, the industry was expected to see a decline in credit quality, Waller said, “but that hasn’t happened yet. Inflation will eventually have an impact if inflation continues at the rate we have seen.

Regarding the rising rate environment the country is currently experiencing, “banks are bound to test this situation,” she said. “They are required to structure their securities portfolio in such a way that they can manage an environment of rising and falling rates to ensure that the impacts on banks will be minimal. I don’t care about the quality of institutions. They are structured to withstand market fluctuations.

Nalezny said there is probably as much uncertainty now as he has seen in his entire banking career. “It’s a lot of cross-currents, a lot of moving parts.”

On the deposit side, interest rates, for the most part, haven’t moved significantly yet, he said, and that’s largely a function of the fact that there’s so much cash in the system. “For this reason, banks are not yet obliged to reimburse deposits. This will change. There is a delay. Eventually, you will see banks forced to repay deposits.

He added that the loan-to-deposit ratio is still at historic lows and he does not know when that will change, possibly next year.

In terms of lending rates, residential mortgage rates have risen significantly and quickly, Nalezny said, but for large institutional loans, Verus Bank doesn’t see it because its bank is more focused on middle-market lending, which doesn’t are not increasing as rapidly.

Even with growing worries about a recession, Nalezny said he doesn’t see those indicators in the places and industries his bank serves. “I don’t see a lot of credit weakness in northern Colorado. Verus Bank continues to be at historic lows on all credit indications, with lows being a good thing.

He added that Verus currently has no loans that are 30 days or even 10 days past due.

Gerard Nalezny
Nalezny

“I look at the Colorado landscape and I don’t see much weakness. That said, even considering Colorado a strong place, it depends on where you are,” Nalezny said.

Working from home has changed the office landscape, which is “much more important in a large metro market like Denver than in Fort Collins, Loveland, Windsor or Wellington. We haven’t had a new office built in years because the cost of construction did not justify the cost of the rents that would be collected,” he added.

Shawn Osthoff, President of Bank of Colorado, which is the fifth-largest banking institution in northern Colorado, said “it’s a very challenging environment.” With fixed rates for three to five years, this “naturally creates a compression of the net interest margin. A rising rate environment is better for banks but is a challenge in this environment in addition to inflation.

Shawn Osthoff
Osthoff

For the Bank of Colorado, business and lending continue to be strong, Osthoff said, but in housing, the 30-year rate is at or above 7% in most cases, which is “a bit a sticker shock for people looking to buy a home. People who would still like to buy a house are sitting on the sidelines to see what happens for a while. There is a strong demand for housing and I don’t think there is an oversupply. It will be interesting to see what happens over the next few months,” he said.

Banks are also struggling to fill vacancies. “The employee shortage is affecting us as much as any state entity. It’s starting to calm down again. If we’re on the edge of a recession, it will level off,” Waller said. Usually there’s a influx of people wanting to work in a recessionary environment, she added, so the situation will “probably resolve itself within the next 12 months, I guess.”

As a small bank in the region, Verus Bank can afford to be more nimble, Nalezny said. During the last recession, his bank loaned a car dealership when no one else would because “we knew the players and we knew the situation. We can make micro decisions. You can’t do that with a national player. They will not do car loans or restoration loans. »

Verus Bank still sees customers borrowing money even with fears of impending recession.

“We have good economic growth in Colorado, and people are still growing and investing and trying to keep up with demand,” he said.

Waller added that the banking sector is “so intertwined with the economy that it affects us. With a high level of capital and strong reserves, we are somewhat isolated due to the mechanisms we have in place, but all the bankers I know are watching the economy and inflation closely, and if that impacts customers, it ultimately affects us.

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