With interest rates at historic lows and economists and the Fed forecasting they will remain there, it is becoming harder to ignore the effects this is having on balance sheet margins. And a decelerating growth rate of U.S. GDP and slowing demand from businesses related to real estate will continue to restrict revenue growth.
While banks and credit Union's are looking at other areas on the balance sheet–interest income, noninterest income and operating costs–to keep the earnings growth intact, there are limited opportunities that will boost earnings in the fourth quarter. How much room is left to lower expenses and or deposit pricing?
Many will try to cut interest expenses but will inevitably start to take on additional risks to improve net interest margins. Ultimately, they will be forced to face lower margins. In fact, if they shift assets to longer maturities to keep net interest margin strong, this could backfire once interest rates start rising.
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