Second Quarter 2019: Banks in Sound Condition but Face Global Slowing and Inverted Yield Curve

September 4, 2019

First Glance 12L provides a quarterly look at banking and economic conditions within the 12th District. The average year-to-date bank net interest margin and return on average assets ratios improved from 2Q18, as comparatively higher short-term interest rates boosted loan yields more than funding costs. However, the yield curve inverted further after mid-year, which could challenge bank net interest margins prospectively. The pace of annual loan growth continued to cool, but seasonal factors lifted the average quarterly loan growth rate and, as a result, the average loan-to-asset ratio. The seasonal acceleration in lending tilted the mix of risk-weighted assets just as capital accretion was constrained by higher dividend payouts. On net, this dampened average risk-based capital measures quarter-over-quarter. Bank dividends were often used to support holding company share buybacks, the topic of this quarter’s “Spotlight” feature. Favorably, quarterly job growth rebounded in the West. At the same time, slowing global growth prospects, accommodative monetary policy abroad, and trade tensions weighed on medium- and long-term U.S. interest rates. Rate moves lifted homebuilding, existing home sales volumes, and lender and real estate investor optimism by mid-2019. However, annual home price appreciation slowed across much of the West.