Rising interest rates and steepening yield curves will likely boost banks’ profitability according to Moody’s, the credit rating agency.
Banks globally have had to contend with low interest rates and flat yield curves for years with little change in sight. But stronger economic activity and shifting inflationary expectations could push long-term interest rates higher in many countries, bolstering banks' net interest margins, Moody’s said in a report.
The gap between long and short-term rates can have a big impact on banks’ net interest margins, and therefore on net interest income, which is a key component of their profitability.
Net interest income is estimated to account for over 60 percent of banks' net revenues globally, the ratings house estimated.
“The shift in the interest rate cycle, should it take hold, will broaden banks’ net interest margins and boost their profitability,” said Alexios Philippides, an analyst at Moody’s. “Long-term interest rates are already picking up significantly in North America, the UK, Norway, and Israel, but it will take time for bank margins to recover provided the shift in rates is sustained.”
Europe and Japan lag US
In contrast to the US, he added most European economies will take longer to return to full capacity, due to the combination of the more moderate fiscal support in the region, a slower vaccine rollout, as well as structurally weaker economic growth.
Likewise, Moody's also expects the Bank of Japan to maintain its loose policy stance, keeping rates low, continuing to depress margins for the nations' banks.
For those global banks rated by Moody’s, net interest margins narrowed to an average of 1.75 percent in 2020 from 1.85 percent during 2019, sustaining an earlier trend for some regions with margins globally down from 1.89 percent in 2016.
Margins dropped further in 2020 because the unprecedented monetary stimulus unleashed amid the pandemic-induced economic downturn further reduced rates and flattened yield curves globally.