U.S. Bancorp executives said the bank's net interest margin in the second quarter could disappoint due to timing issues as banks continue to wait for consistently rising rates.
Speaking May 30 at the Deutsche Bank Global Financial Services Conference, CFO Terrance Dolan said the bank's NIM in the second quarter could be affected by loans that use the London Interbank Offered Rate, or LIBOR. He said there was a timing issue in the repricing of loans and deposits that will lead to a second quarter that "may not be as strong, for us at least, as people might expect."
While banks have been longing for a rising-rate environment to boost earnings, some difficulties have emerged despite three rate hikes from the Federal Reserve. Matthew O'Connor, an analyst for Deutsche Bank, noted that the 10-year Treasury rates have declined even as the widely expected June rate hike approaches.
"To the extent that the yield curve is flattening, obviously, our ability to be able to move further out on the curve in terms of our investment portfolio, et cetera, that gets muted," Dolan said.
On deposit betas, a term that describes how much of the rate hike banks pass on to customers, management said the first three increases in the fed funds rate generated betas of 20% to 24%. While management said the beta was surprisingly lower in the most recent hike than the first two, executives said they expect the next rate increase to generate a beta of 30% to 35%. For the long term, the bank models deposit betas at 50%. But President and CEO Andrew Cecere said the more important question is the rate of outflows in a rising-rate environment.
"No one has asked this question on this — and I think it's more relevant than the beta — is the assumption on deposit outflows in a rising-rate environment," Cecere said. "The companies are sitting on a lot of cash right now. That cash is on our balance sheet and [demand deposit accounts]. We have over $80 billion of [demand deposit accounts], and the assumption you make on how much of that will outflow as the economy starts to strengthen, I think, is an important one."
Asked by O'Connor what the bank models for those outflows, Cecere cryptically responded that it uses "a conservatively realistic assumption," eliciting laughter from the crowd.