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A Closer Look at the Impact of Rising Rates on U.S. Banks' Profitability

This commentary reviews the impact of rising rates on bank’s profitability.

Key highlights include:

• A broad conclusion from quarterly U.S. Bank FDIC data is that loan loss provisioning needs typically only increase materially as a result of recessions, not periods of rising interest rates

• Generally, rising interest rates are a positive for banks, as their balance sheets are asset-sensitive (assets will reprice higher faster than liabilities)., Thus, net interest margins should expand, bolstering profitability. An upward sloping yield curve and rising rates typically signal that the economy is expanding and doing well

• U.S. banks have generally been able to report higher net interest income regardless of the interest rate cycle by growing earning assets. Since 2000, U.S. banks' net interest income contracted modestly in 2011-2013 and more substantially in 2020, reflecting significant net interest margin pressure

“In this piece, DBRS Morningstar looks at the impact of rising rates on a bank’s profitability, including net interest income (NII) and loan loss provisions (LLPs) as interest rates increase.” said Michael Driscoll, Managing Director, Head of NA FIG – Global FIG.