A Hostile Rate Environment
With the Federal Reserve keeping its short-term federal funds target rate in a range of between zero and 0.25% since late 2008, most banks have already seen most of the benefits of lower funding costs. Meanwhile the Fed is doing everything it can to keep long-term rates at their historically low levels, which leaves most banks with narrowing net interest margins as loans reprice. Banks are also looking to keep the maturity of their securities investments short, so they can take advantage of better opportunities when rates eventually rise again. Goldman Sachs analyst Kris Dawsey on Wednesday wrote that "based on our economic forecasts the Fed may purchase up to $2 trillion in Treasury securities and MBS under QE3, before the first fed funds rate hike in early 2016." The Federal Reserve Open Market Committee itself has said that it "anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." This means that banks will continue to feel the margin squeeze for years, and in order to grow earnings -- and support higher stock prices -- banks have to ride the mortgage loan refinance wave, grow their commercial loan portfolios, and cut expenses. For many of the largest industry players, the continued release of excess loan loss reserves has been padding earnings.