Investment Management: Lenders’ Decision to Extend Duration Looks Risky

July 17, 2014
Fitch says banks are doing this at exactly the wrong time.

BankingTreasurers seeking to lock in low rates for long terms have had a lot of successes recently. But their lenders will pay the price if rates start to rise. Fitch says, “A meaningful number of U.S. banks have seen loan portfolio durations extended,” and warns that this will be a “headwind on net interest margins over the short and medium term.”

In the first quarter, Fitch says that loans dated longer than five years constituted 25 percent of all loans at FDIC-insured banks, up from 18 percent at the end of 2008. This is the highest since FDIC started tracking this data in 1997.

Community banks are extending durations even more – one third of their loans are over 5 years in tenor. Fitch says large regionals can hedge themselves with interest rate derivatives – and they do: 40 percent of their assets are comprised of rate derivatives. But for community banks that figure is only 6 percent, so the most duration-exposed institutions are also the most inadequately hedged.

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