The Federal Reserve has indicated we could see two more rate hikes in 2018 after a 25-basis-point hike in the Fed funds rate in March 2018 to 1.8%. Rate hikes have helped banks (XLF) with higher net interest margins (or NIMs). However, the yield curve has flattened in recent months, suggesting we won’t see a major expansion in spreads going forward. Thus, rate hikes from here on will impact credit offtake as corporates could look to reduce leverage amid lower taxes and improving cash flows.
Middle market lending companies including Prospect Capital (PSEC) are already facing subdued credit offtake mainly due to higher rates. Thus, credit offtake through retail and global banking expansion will be key for bankers in 2018.
Other major central banks including the European and Japanese central banks could also look to reverse their monetary easing in 2H18, which should result in higher yields on debt offerings over the next few years.
Global presence for book expansion
Banks with a global presence could manage to post decent growth in credit offtake in 2018 as lending slows in the US amid lower taxes and high rates. Citigroup (C) has managed double-digit growth in Europe and Asia in 1Q18 in its core banking business. Bank of America (BAC), Goldman Sachs (GS), and JPMorgan Chase (JPM) are also increasing offerings, branches, and banking in Asia and Europe to take advantage of high growth in the regions.
US banks are targeting core banking solutions, low-cost funding, credit card business, and asset management areas in Europe and emerging markets.