Financial institutions continue to face shrinking Net Interest Margins (NIM) due to higher volatility and low interest rates. This trend is forcing banks to develop new solutions to improve their financial performance. A recent article from Bank Director, offers suggestions on how institutions can examine their balance sheet to uncover every possible basis point.
Increase your loan portfolio. Financial institutions should meet consumer demand for long-term, fixed rate loans. Although not always the preferred option, and sometimes a problem for institutions whose interest rate risk position doesn’t align with this type of loan, it is a way to increase long-term profits. Institutions not able to offer long-term, fixed rate loans should consider circumventing this type of loan by offering wholesale funding sources or interest rate swaps.
Maintain Prepayment Language. Financial institutions can lose up to 90 basis points by eliminating prepayment language altogether. Instead, institutions should include a minimum 1-2 year lock out on prepayment, which preserves some basis points while allowing the institution to remain competitive.
Scrutinize Bond Trade Details. By examining TRACE and Bloomberg’s Trade History Functions, you can determine the mark-up on bond purchases. Making informed decisions before executing bond transactions can increase your NIM by 1.5-5 basis points.
Save Interest Expense Through Wholesale Funding. Participate in an interest rate swap and borrow from the FHLB to reduce interest expense.
Utilize Derivatives. Derivatives can help an institution identify inefficient market pricing or even change their interest rate profile.