Garnet Capital Advisors Blog

China's "Black Monday" has wreaked havoc on global economies.

While bankers and investors have anxiously been anticipating a rise in interest rates after a prolonged low-interest environment, the rug may have been pulled out from under them with the recent collapse in the Chinese market.

Even though unemployment in the US has started to gain some health and the overall economy has been improving, the latest debacle in China has thrown a wrench into the situation.

All eyes have been on the Federal Reserve, which has been expected to increase interest rates at its September meeting. For months, it has seemed as though the pendulum would soon be swinging towards higher rates.

However, economists warn the US Federal Reserve that it could risk triggering panic in markets if it chooses to increase rates this month, and that it should hold off until the global economy stabilizes.

Yet the longer the Fed keeps rates low, the bigger the shock will be when they start to rise. The big factors that aren't known today are how fast and how high interest rates will increase, and when.

How Will Extended Low Interest Rates Affect Banks?

China's "Black Monday" last month has essentially quashed hopes of any prospect of U.S. interest rates being increased this month. And banks are feeling the brunt of it.

While the Fed's low interest-rate policy has allowed banks to lower their borrowing costs since the crash of 2008, it's also been a thorn in their side. Prolonged interest rates have limited what banks can charge on loans and profit on other investments. The net interest margin has therefore been on a steady decline since 2010.

With such a sustained low-rate environment having a negative effect on revenue and earnings for banks, an increase in rates would be highly welcomed.

Volatility in the Market Could Put a Damper on Advisory Fees

Banks could very well feel the effects of the recent market volatility on their advisory fees.

If no rebound takes place following the market correction in the US, banks will likely experience lower wealth-management fees in the third quarter because they're typically charged as a percentage of assets.

Bankers who team up with the right advisors can still profit amidst a continued low interest environment.

And the abrupt devaluation of the Chinese yuan will have a detrimental effect on the biggest banks in the US, particularly those which are highly involved in foreign exchange trading. With little time to hedge their assets, big banks that are exposed to foreign markets will feel it the most.

A sudden move in the market can catch banks and lenders off guard and corrode the potential benefit of increasing rates. Coupled with regulatory challenges that banks have already been facing, key sources of revenue have been continued to be capped.

Negative Impact on Earnings With No Sight of Rise in Rates on the Horizon

If a rise in interest rates is no longer in sight - at least for the short term - earnings estimates for banks will set high, and not necessarily be met. Banks with asset-sensitive balance sheets that would benefit greatly from a spike in rates have realized bigger stock price drops over the past month. This can be seen in drop of the KBW Nasdaq Bank Index of US commercial banks of 11 percent throughout August.

And even if the Fed does increase rates some time in the near future, they won't necessarily be setting them dramatically higher.

In the meantime there is concern in emerging economies, which is a real problem across the globe. Overall, we will most likely be seeing a slower global growth phase.

What Recourse Do Banks Have Amidst This Continued Low Interest Rate Environment?

Loan portfolio sales and acquisitions have continued to be a way for banks to justify non-core assets, get rid of non-performing portfolios, and fund the origination of added loan portfolios. Loan acquisitions have allowed banks to acquire loans suited to their comfortable risk level without completing the origination processes.

But by continuing to hold onto long-term loans throughout this extended low interest rate environment, lenders and banks are essentially stuck with dead-end loan portfolios which do little to boost their bottom line.

Replenishing cash reserves is possible through the sale of loan portfolios in the loan market - banks can lend money to consumers, knowing that they can still sell these loans if they're in a position where cash reserves need to be replenished. Banks may also choose to sell loans to keep their loan originators busy if they're out of money to loan out, but still need to underwrite loans.

At Garnet Capital, we help financial institutions and credit grantors remain liquid, and manage the sale and acquisition of loan portfolios to allow them to withstand the pressures of economic turmoil that the US is facing today.

Market volatility has put creditors in a position to choose which portfolios should be bought or sold, and how much in cash reserves should be held on to. Ideally, banks should earn higher profits if higher-earning assets occupy a bigger proportion of the loan portfolios.

While it can definitely be a challenging task to find that fine line between what to keep, what to sell and what to purchase, the process is simplified when the right advisors are put in place. And Garnet Capital is your source for the financial advice you need, especially during this time of economic uncertainty.

Go online at GarnetCapital.com today and sign up for our newsletter to receive the latest news in the banking industry, and to find out how teaming up with the advisers at Garnet Capital can be key to realizing a growth in profits and reduction in loss.