Banks demonstrate different levels of sensitivity
The risk of rising or falling interest margins arises from uneven maturity structures between deposits and receivables. Influences from the shift in the interest rate curve could be largely neutralised by observing matching maturities. However, in practice interest rate changes have strongly divergent effects on interest margins or net interest income depending on the structure of the loan and securities portfolios (lending business) and the financing side (deposit business). Loan agreement terms (with variable interest rates or interest rates fixed for a certain period) and the less pronounced adjustment of rates for customer deposits (refinancing) to the benefit of the banks may also play a decisive role in the event of interest rate hikes. There are also different levels of interest rate effects over time depending on the maturity scale.
The development of the interest margin business therefore also depends on bank-specific variables and forecasts are accordingly complex. The available calculations are largely based on internal bank models with simplified assumptions, such as the scenario of a parallel shift in the interest rate curve. In the event of flattening or even inversion, the sensitivities change. In light of this, the information provided by the banks mentioned in the two charts only offers certain indications for investors.
The cycle of interest rate hikes is positive overall despite secondary effects
If the interest rate environment shifts, further aspects must also be taken into account. The majority of banks benefit from rising interest rates, as shown in the charts above. However, even more far-reaching effects can sometimes occur, as higher interest rates can also lead to increasing burdens on borrowers and thus more loan defaults. Nonetheless, the net effect is likely to be positive, particularly with regard to a possible normalisation from the current low-interest-rate level. Consequently, this should have a positive impact on bank stocks.
From an investment policy perspective, we currently prefer Canadian and US bank equities over European stocks due to the more favourable interest rate dynamics.