Rising interest rates to boost banks’ profitability
Stronger economic activity and shifting inflationary expectations may push long-term interest rates higher in a number of countries, bolstering banks’ net interest margins (NIMs), said Moody’s Investors Service in a report yesterday.
Its vice-president and senior analyst, Alexios Philippides, said the shift in the interest rate cycle, — should it take hold — would broaden banks’ NIMs and boost their profitability.
“Long-term interest rates are already picking up significantly in North America, the United Kingdom, Norway and Israel, but it will take time for bank margins to recover, provided the shift in rates is sustained.”
The rating agency said most economies would return to growth this year but the recovery would be uneven.
“Rapid progress in vaccinations has allowed some countries to reopen more broadly, and fiscal stimulus is accelerating the pace of recovery.”
Philippides said while global monetary policy would remain broadly accommodative in the near term, faster recovery and higher inflation would contribute to yield curves steepening and an eventual rise in reference rates in some jurisdictions, provided the Covid-19 pandemic was contained.
He said for banks in emerging market countries where pandemic control was lagging and where reliance on capital inflows was high, the negative effects from rising global interest rates could outweigh benefits from higher margins.
“In Asia Pacific countries, the slow pace of vaccine rollouts will delay the recovery and continued virus containment will require more prolonged restrictions and delayed reopenings,” he said.
Philippides said the strength of recovery would likely vary across emerging markets. Rising United States rates and the consequent tightening in global financial conditions might affect capital flows to emerging markets.
“We believe that policy responses across emerging market central banks over the next couple of years will be far from uniform. Emerging market central banks face a trio of challenges in the form of slow recoveries, rising supply-side inflation and volatile capital flows,” he said.