Weak loan demand and low net interest margins (NIM) continue to weigh on performance of national banks, their federal regulator said Monday, punctuated by higher operational and compliance risks.
In its Semiannual Risk Perspective for Fall 2021, the Office of the Comptroller of the Currency (OCC) said banks are “weathering the COVID-19 crisis with resilience and satisfactory credit quality and strong earnings,” but the flagging loan demand and decreased NIM continue to hinder performance.
NIM, which is gauged by comparing the net interest income a bank earns on loans to the interest it pays savers, dipped to a record low at federally insured banks in the first quarter of the year.
Meanwhile, the OCC said in the report, operational risk is higher as banks respond to an “evolving and increasingly complex operating environment and cyber risks.” Compliance risk is also raised, the agency said, driven by “regulatory changes and policy initiatives that continue to challenge risk management.”
The report also asserts that strategic actions taken by banks to offset the effects of lower NIM and yields remain a risk. Stimulus measures, low-yield investment options, and reduced lending opportunities fueled deposit inflows that resulted in additional highly liquid assets and lower margins as banks struggled to find yield,” the report stated. “Banks may attempt to further improve earnings through measures including increasing credit risk (in both loans and investments), extending loan duration, and cost cutting.”
Credit risk, on the other hand is moderate, according to the report. The OCC said widespread government programs to offset the financial impact of the coronavirus crisis, and appropriate risk management by banks, limited the impact on credit. However, the agency said, some areas “warrant continued attention.”