August 12, 2023 / VOLUME NO. 274

The Coming Storm

This week, Moody’s Investor Service downgraded 10 U.S. banks, put 11 banks on negative outlook and placed six on a review for a downgrade. The firm cited growing pressures on profitability given that rising rates are draining deposits from the industry, as well as growing asset risk, “in particular for small and mid-size banks with large [commercial real estate] exposures.”

One banking expert who has been warning publicly about a coming storm since last summer is Brian Leibfried, Performance Trust Capital Partners’ head of bank insights. Leibfried, armed with proprietary analytics, shows major trouble could lie ahead. He has met with dozens of bank boards and spoken at industry conferences to share these insights. In April, with Federal Reserve’s fed funds rate at 5%, his firm produced a report projecting that more than 1,000 banks could become unprofitable in the coming year, assuming rates remained unchanged and competition for deposits continued to drive cost of funds higher. Today, with the upper bound of the target fed funds rate at 5.5%, Leibfried says over 1,400 banks could find themselves at or below 0.25% ROAA in the next 12 months — if the fed funds rate remains unchanged. The median ROAA in the first quarter was 1.27%, according to the Federal Deposit Insurance Corp. 


Part of the problem is a lack of awareness. Many bank asset/liability management reports, which inform boards and regulators about future cost of funds, net interest margins and return on assets, are built on highly precise calculations. But these reports produced inaccurate forward-looking projections throughout 2022 and 2023, he says. By accident, these reports may have fueled confusion or complacency. 

As the industry prepares for August board meetings, CEOs and CFOs may want to ask themselves: Where is my ROA truly heading if rates do not change? What if rates continue to rise? Does my asset/liability reporting on future net interest margin and return on assets align with what we truly believe? If not, management might want to say that clearly. After all, boards and regulators don’t like surprises. “We’re nearing a place where people are going to feel surprised,” Leibfried says. 

• Naomi Snyder, editor-in-chief for Bank Director

For more on this topic, Bank Director’s Director of Research Laura Alix wrote about asset/liability management for Bank Services members.

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Turnover in the boardroom can be healthy. Find out how many boards have added new directors, based on Bank Director’s 2023 Governance Best Practices Survey. 

“You want fresh ideas to make the bank as strong as it can be.” — Robert Fleetwood, Barack Ferrazzano

• Emily McCormick, vice president of editorial & research for Bank Director

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