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Watch A Bank's Liabilities
While there is much contentious debate in the marketplace over when the Federal Reserve will start raising interest rates, it is clear that eventually rates will be moved higher. This will have a direct impact on banks, as the cost of funds is one of the important determinants of the profitability of an institution.
Investors can tell which banks may be hurt in a rising interest rate environment by looking at the balance sheet and seeing what percentage of its liabilities have to be repriced in the short term. Banks with a high percentage of liabilities that have to be repriced in a rising rate environment will typically see an increase in the cost of funds.
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This is only one of many factors that determine profitability for a bank, and must be viewed in context of the entire balance sheet including the yield on earning assets and the percentage of deposits that are brokered. Equally important is the timing of the repricing of those assets and the asset quality.
Bank Funding
Republic Bancorp, Inc. (Nasdaq:RBCAA) had total deposits of $2.6 billion as of the end of 2009. Approximately 12% of these deposits are non-interest bearing, which is obviously the best source of funding for a bank.
If you dig a little deeper into the filings for Republic Bancorp, the bank discloses that during the last quarter of 2009 and January 2010, it funded its balance sheet with $1.46 billion in brokered deposits. These deposits were short term with an average life of less than three months, and as short as 55 days for some.
Republic Bancorp is a special case because it is less of a traditional bank than most of its peers. The bank took on the brokered deposits to fund its Refund Anticipation Loans business, which is part of the Tax Refund Solutions segment.
This business only operates during the first quarter, and the bank reported no short-term brokered deposits as of the end of first quarter of 2010.
The Other Banks
International Bancshares Corporation (Nasdaq:IBOC) also has a high percentage of liabilities repricing within 12 months. The bank had total interest bearing liabilities of $8.6 billion at the end of 2009, with $7.1 billion due to be priced in less than 12 months.
UMB Financial Corp (Nasdaq:UMBF) reported total interest bearing liabilities of $10.7 billion at the end of 2009, with $6.0 billion repricing in 2010. This figure, however, is close to the percentage of assets repricing for the bank, which somewhat mitigates the higher cost of the funding.
Some banks have the opposite problem. Cullen Frost Bankers (NYSE:CFR), has only 10% of its liabilities set to reprice within the next 12 months. This should help the bank keep a low cost of funds going forward, but of course total profitability will be impacted by other factors, as discussed earlier.
The Bottom Line
The coming rise in interest rates will raise the cost of funds for all banks, with some hurt more than others, depending on the configuration of its balance sheet. Investors should examine this and other factors prior to investing. (To learn more, check out Analyzing A Bank's Financial Statements.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 10 Biggest Losers In Finance
This is only one of many factors that determine profitability for a bank, and must be viewed in context of the entire balance sheet including the yield on earning assets and the percentage of deposits that are brokered. Equally important is the timing of the repricing of those assets and the asset quality.
Bank Funding
Republic Bancorp, Inc. (Nasdaq:RBCAA) had total deposits of $2.6 billion as of the end of 2009. Approximately 12% of these deposits are non-interest bearing, which is obviously the best source of funding for a bank.
If you dig a little deeper into the filings for Republic Bancorp, the bank discloses that during the last quarter of 2009 and January 2010, it funded its balance sheet with $1.46 billion in brokered deposits. These deposits were short term with an average life of less than three months, and as short as 55 days for some.
Republic Bancorp is a special case because it is less of a traditional bank than most of its peers. The bank took on the brokered deposits to fund its Refund Anticipation Loans business, which is part of the Tax Refund Solutions segment.
The Other Banks
International Bancshares Corporation (Nasdaq:IBOC) also has a high percentage of liabilities repricing within 12 months. The bank had total interest bearing liabilities of $8.6 billion at the end of 2009, with $7.1 billion due to be priced in less than 12 months.
UMB Financial Corp (Nasdaq:UMBF) reported total interest bearing liabilities of $10.7 billion at the end of 2009, with $6.0 billion repricing in 2010. This figure, however, is close to the percentage of assets repricing for the bank, which somewhat mitigates the higher cost of the funding.
Some banks have the opposite problem. Cullen Frost Bankers (NYSE:CFR), has only 10% of its liabilities set to reprice within the next 12 months. This should help the bank keep a low cost of funds going forward, but of course total profitability will be impacted by other factors, as discussed earlier.
The Bottom Line
The coming rise in interest rates will raise the cost of funds for all banks, with some hurt more than others, depending on the configuration of its balance sheet. Investors should examine this and other factors prior to investing. (To learn more, check out Analyzing A Bank's Financial Statements.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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