A veteran bank stock portfolio manager thinks sustained low-interest rates could lead American banks down a path similar to Blockbuster Video. The culprit is the same in both cases: not embracing change in a timely manner.
David Ellison, a portfolio manager at Hennessy Funds, which oversees $4.8 billion in assets, told the financial website Quartz, a core means of making money is faltering. Big lenders may not suddenly go obsolete like video-rental stores, but the profit they make from the spread between deposit rates and loan rates keeps getting skimpier.
The article also points out in a low-rate environment, the biggest banks have it better than smaller lenders. The likes of Citigroup have diversified businesses that rake in billions from advising clients on mergers and acting as a broker for trading. Small community banks, meanwhile, can be almost entirely dependent on net interest margin.
Banks can find ways to compensate for thin lending margins by leaning on fee-based income or dialing up the amount of risk they take. But as rates drift ever closer to zero, interest income doesn’t seem likely to offer attractive returns for banks in developed markets anytime soon. If stock prices are any indications, lenders must urgently come up with new ways to make money.
To learn more about mortgage banks and Blockbuster, click on the image above.