Page 15 - BusinessWest July 24, 2023

“I won’t even call this a short-term problem anymore when it comes to profitability. It’s
a medium-term problem that we’re all having to adjust to.”
effect on banks — and their customers. For banks, these moves are squeezing margins that were already tight, with some margins off 50 basis points or more from last year. And for public banks, their stocks have, for the most part, been hammered.
This domino effect involves everything from the huge increase in interest paid to customers on their deposits to the manner in which those interest-rate hikes have brought the home-mortgage business to a virtual standstill.
To quantify that increase in interest paid to consumers, Tom Senecal, president and CEO of PeoplesBank, recalled a quote he read from the president of a large national bank that put things in their proper perspective.
“He said, ‘my raw-material costs have increased 600%,’” Senecal noted. “His raw materials are the funding for deposits for his whole- sale assets, which have literally gone up 600%. If you look at any business and their profit margins — our raw materials have gone up 600%, so that squeezes our margins.”
Meanwhile, with interest rates more than double what they were a year or so ago, the refi market has obviously disappeared, said Kevin O’Connor, executive vice president of Westfield Bank, adding that, with home sales, those who might be thinking about trading up wouldn’t want to trade a 2% or 3% mortgage for one closer to 7% mortgage, so they’re taking what could be called a pause.
As is the Fed, which is taking a close look at the impact of its interest-rate hikes before deciding what to do next, although most experts expect at least one more rate hike this year.
And that will keep banks on this current treadmill, said Jeff Sul- livan, president and CEO of Springfield-based New Valley Bank, adding that, while there has been talk that rates might start coming down this year, that likely won’t happen until at least early next year.
By then, the country may well be in recession, adding new levels of intrigue, said Moriarty, noting that the yield curve is currently inverted, a historically accurate predictor of recession.
“We’re going to eventually get into a recession in the third or fourth quarter of this year,” he said. “We were anticipating it might happen a little earlier with hopes that the Fed would have cut rates before of 2023, but now, we’re guessing that interest rates are going to be elevated another year out until they start cutting.”
Tom Senecal says unprecedented interest-rate hikes have put a great deal of pressure on banks large and small.
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