Repricing Opportunity

What is a Repricing Opportunity?

A repricing opportunity is a change in the market environment that allows for a reassessment of the value of an investment. This can happen with stocks, bonds or other types of investments. The change that precipitates a repricing opportunity vary. Changes in interest rates, for example, affect almost every type of asset and can create repricing opportunities in the banking and capital markets in particular.

Understanding Repricing Opportunities

The changes that lead to a repricing opportunity may be company specific, sector specific or market wide. In some instances, the term repricing opportunity is used as a softer way to refer to situations where an asset has seen a worsening in its fundamentals.

For example, the oil price collapse in 2014 was a repricing opportunity for the entire upstream oil sector. While the oil prices were high, even companies with weak balance sheets and high costs-per-barrel were seeing profits. When prices collapsed, a large segment of the market was producing to cover bills rather than to drive profits. This repricing opportunity led many investors to reduce their exposure to the energy sector, something that was clearly shown in benchmark exchange-traded funds like Vanguard's Energy ETF (VDE) which fell 45% from July 2014 and January 2016.

Industry Specific Repricing Opportunities

In business, there are two additional usages of repricing opportunity. In retail and sales, a repricing opportunity is created when the demand for a product is much lower or higher than expected. When the demand is higher than expected, the product can be repriced higher to capture more profit. When the demand is lower than projected, the product can be repriced downwards to encourage more sales. The products in question are usually physical goods that have a shelf life, inventory cost or production lag that makes accurate pricing to the available volume important to the seller.

In the banking sector, repricing opportunities are periods when interest-rate sensitive assets and liabilities are up for adjustment. Banks earn income from interest, so their income fluctuates with changes in interest rates. When they issue loans or sell certificates of deposit, they embed repricing opportunities into the contracts to allow for periodic adjustment. This helps reduce the risks that the interest rate will go up or down in a way that negatively impacts the bank's return. A bank can minimize its interest-rate risk and maximize its net interest income by minimizing the differences between its assets, such as adjustable-rate mortgages, and its liabilities, such as the rate of interest it pays on customer deposits or certificates of deposit, whenever these periodic repricing opportunities come up on the products.