Banks can take an explicit bet on short or long term interest rates by how they position their loan portfolio. CompleteBankData provides a breakdown for banks showing a maturity and repricing schedule of a bank’s loan portfolio. I spent some time today running some statistics to see how banks are positioning themselves regarding rates.
When a bank expects rates to rise they keep the maturity of their loan portfolio short term (short duration). A bank keeps the duration short it’s because they expect their lower yielding loans to be replaced by new higher rate loans. When rates rise banks with short duration portfolios see increases in their NIM if deposit costs don’t rise as fast as portfolio yield. If rates don’t rise as quickly as a bank expects them to then short duration portfolio can result in a lower net interest margin (NIM).
A bank that doesn’t expect rates to rise might be more willing to lock in longer term loans. If a bank expects rates to decline then they would want the majority of their portfolio to mature as late as possible.
Most banks in the US have positioned themselves for a rise in interest rates. But before looking at the majority I think it’s worth looking at the minority rate opinion.
There are 18 banks in that have 80% or more of their portfolio maturing in longer than 15 years. This means that 18 banks have decided that they are happy with current rates and would like to lock them in for the next 15 years. This is an implicit bet on rates decreasing or staying stable for the next 15 years.
Banks making this bet range from Territorial Bancorp (TBNK), a $930m bank that primarily loans to residential borrowers to First Federal Savings & Loan a small $15m bank located in West Virginia also focusing on residential borrowers.
Before the advent of mortgage securitization if a bank wanted to keep their portfolio duration short they would need to limit their lending to only short term loans. Securitization created an opportunity for banks to manage their portfolio duration regardless of the types of loans they originate. Now a bank can originate a 30-year mortgage and if they decide they don’t want to hold it sell it to a GSE and retain servicing rights only keeping short term loans on their books.
Securitization makes the following statistics meaningful. These banks have all actively managed their portfolios to keep their duration short. As shown below the majority of US banks are expecting rates to rise sooner rather than later.
- 3538 (more than half) banks have 50% or more of their portfolio maturing or repricing in less than three years.
- 1099 banks have 70% or more of their portfolio maturing or repricing in less than three years.
- 142 banks have 90% or more of their portfolio maturing or repricing in less than three years.
- 836 banks have 50% or more of their portfolio maturing in less than a year.
- 97 banks have 80% or more of their portfolio maturing in less than a year.
The numbers are clear, banks are expecting rates to rise within the next three years. Some banks are expecting rates to rise in the next year, although those banks are in the minority.