The flat yield curve is likely to weigh on net interest margins at the big U.S. banks and will slow revenue growth, Fitch Ratings said Monday. Banks benefited in the first quarter from the Federal Reserve’s rate hike in December, but that effect was short lived. “Banks may experience a boost in non-interest income as demand for residential refinance ticks up in the low rate environment; however, that will not be enough to offset pressure from the flattening yield curve,” said Bain Rumohr, a Fitch Director. The yield curve has flattened as expectations for further rate hikes were tamed, first by market turmoil in January and later, by the fallout from the Brexit vote. Banks are gearing up for a longer period of low interest rates by extending balance sheet duration, said Fitch. Loans and securities maturing or repricing more than five years out now represent 30% of total loan portfolios, it said. “Even with gradual rate rises in the near term, if the yield curve remains on a flat trajectory, history suggests that banks will continue to see NIM compression unless there is a steep yield curve,” said Julie Solar, a Fitch senior director. The agency will be watching for any significant changes to balance sheet management strategies by individual banks to boost short-term earnings and could take negative actions on ratings.
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