Executives at US retail banks had been looking forward to 2016.

This was meant to be the year they would finally gain some relief from rock bottom interest rates, which have hurt the industry’s profit margins.

Richard Davis, chief executive of US Bancorp — the country’s fifth-largest listed lender by assets — gave a sense of banks’ anguish about monetary policy a year ago when he said waiting for rates to rise was akin to “torture”.

But the Federal Reserve this month confirmed what investors had assumed for several weeks: rates are to be kept lower for longer.

Officials expect to follow up the modest rate rise they brought in before Christmas with only two increases this year, not four as previously envisioned.

The more dovish stance will cost the US banking industry about $5bn, estimates Mike Mayo, analyst at CLSA.

Investors believe the Fed will prove to be even less obliging to banks than they have stated publicly. Futures markets point to just one increase this year. “At this point, if banks could sign up for two rate hikes, they’d take it,” Mr Mayo says.

As Nancy Bush of Georgia-based NAB Research puts it: “It’s a struggle, and the longer it goes on the bigger a struggle it becomes.”

The industry’s net interest margin — a measure of the difference between the rates at which banks borrow and lend — touched its lowest level last year since records began in 1984, according to the Federal Reserve Bank of St Louis. Even after ticking up in the final quarter they ended 2015 at only 3.02 per cent, about a fifth lower than six years ago.

Their peers across the Atlantic have it even worse. The European Central Bank has gone sub-zero, charging banks 0.4 per cent on much of the €700bn worth of excess deposits they have parked with it.

Although the ECB’s expanded asset-purchase programme will ease the funding difficulties of weaker banks in Europe’s periphery, negative rates are forecast to cut earnings per share by 5-10 per cent overall for eurozone banks this year, according to Morgan Stanley analysts.

Some lenders are affected by central banks’ monetary experiments more than others. A report by Barclays’ US banking analysts published this week highlights the divergence.


While a one percentage point rate rise would boost earnings per share this year at Bank of America by 13 per cent, they estimate, it would lift Wells Fargo’s only 1 per cent.

In the jargon, a bank is more sensitive to rising rates if its assets reprice by more — or at a faster pace — than its liabilities. In practice, this depends in part on the nature of its customers. When rates rise, lenders try to keep deposit rates as low as possible while increasing rates for borrowers.

About half the loans on the books of BofA offer variable terms, such as credit cards. In contrast a significantly higher proportion of Wells Fargo’s are fixed, such as car loans. That helps make Wells Fargo less rate sensitive than BofA.

Banks are also more rate sensitive if they can keep a lid on deposit rates. When monetary policy tightens, the more cash depositors have in low-rate current accounts the better for banks.

According to Barclays, more than half the deposits at Comerica — the Texas-based lender the analysts regard as the most interest rate sensitive of the 22 banks they track — are in “non-interest bearing” accounts. Conversely, less than a third of deposits at BB&T are in such accounts — helping to make it among the third least rate sensitive.

“I don’t know any banks that are loving lower for longer, but it’s different degrees of pain,” says Greg McBride, chief financial analyst at the comparison site Bankrate.com.

While their fates are shaped by decisions in Washington, banks can help themselves. The most obvious way is to cut costs. Staff are being let go and branches closed across the industry.

Lenders can also rejig their securities portfolios. After taking a view last year that rates were likely to be lower for longer, Wells Fargo has been reducing the amount of cash and short-term investments it holds and buying longer-term bonds.


Increase of earnings per share this year at BofA if rates rose by one percentage point, Barclays’ analysts estimate.

Other business lines can also help. BB&T unveiled a deal last month to buy the insurance broker Swett & Crawford for $500m.

For some investors the sector’s battered valuations — the KBW index of 24 US banks trades at a 10 per cent discount to book value — present a big buying opportunity.

Bill Smead, founder of Smead Capital Management, says he has allocated 14 per cent of his $2.3bn of assets under management to three banks: JPMorgan, BofA and Wells Fargo.

The stocks “scream” good value, he argues, adding they are well positioned for the long term.

And relief could, finally, be on the way. Some policymakers are again making hawkish noises. Last week Patrick Harker, president of the Philadelphia Fed, called for the central bank to “get on with” rate increases.

Additional reporting by Martin Arnold

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