For Community Lenders, Net Interest Margin Pressure Looms Large

Source: American Banker

Community bankers are increasingly concerned about the downsides of rising interest rates — notably, weaker economic conditions and upward pressure on deposit costs.

That's according to the Conference of State Bank Supervisors' annual survey of community bankers. The CSBS polled 470 bankers between April and July of this year and found that 35% labeled net interest margins as "extremely important" and another 53% said NIMs were "very important."

Banks collectively grew loans and net interest income in the first half of this year, as customers borrowed more to invest following the worst of the pandemic. At the same time, interest rates started to climb, making loans more profitable. This helped many lenders expand their margins.

Bankers, however, worry the good times can last only so long. Rising rates impact adjustable-rate loans almost immediately, while customers tend to gradually demand higher rates on their deposits. As such, after months of rising rates, bankers expect deposit costs will soon begin to climb and NIM pressure could mount.

In all, 88% of bankers surveyed ranked the potential for narrowing margins as their top external concern — a risk they cannot fully control through internal processes.

Bankers view the lagging deposit cost factor as "problematic," particularly as it may come just as the economy slows and loan demand ebbs, said Meredith Covington, a senior manager at the Federal Reserve Bank of St. Louis who worked on the CSBS survey.

Indeed, bankers' second-most pressing external concern is the economy and the likelihood it could buckle under the weight of lofty inflation and high interest rates.