Data compiled by Fitch on all
Within Fitch's rated universe, community banks are consistently more concentrated in long duration loans, averaging roughly one-third of loans over five years in length as of the end of 1Q14, up just marginally from the end of 2008. This generally corresponds to industry data which shows that community banks (generally less than
Large and midtier regional banks have a lower proportion of longer-dated loans relative to community banks, but long loan growth as a proportion of total loans among regional banks has been more pronounced, as loans over five years have grown to 22% of total loans, up from approximately 16% in 2008. Multiple regional banks have communicated strategies to hold longer-term conforming mortgages, which can increase interest rate risk in a rising rate environment, depending on the mortgages' maturity and repricing characteristics. While retained conforming mortgages remain small, we have concerns about loan extension risk as rates rise.
Fitch also believes that increases in auto loans could be contributing to the rise in longer-dated loans on balance sheets. A recent report released by the
Interest rate derivatives mitigate some rate risks, particularly for larger banks. Interest rate derivatives have been prominent at large regionals, comprising around 40% of total assets on a notional basis. Such hedging activity could blunt the impact of rate volatility on margins and asset values as rates rise. In contrast, Fitch's community bank peer group tends to utilize hedging strategies much less than larger peers with interest rate-related derivatives accounting for under 6% of total assets for the group.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Source: Fitch Ratings
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