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Understanding Balance Sheet Impacts in Uncertain Times

Uncertain economic times lead to market volatility and shifting rates, calling for an active, tailored and disciplined approach to balance sheet management. Our Financial Institutions Group works with community banks and credit unions, providing guidance to meet the unique needs of institutions, their goals and risk profiles. Trusted financial experts should provide actionable insight that helps keep senior management focused on what matters most—our goal is to help clients formulate a strong, flexible strategy to avoid impacts to earnings and maximize performance.

Kent Musbach, SVP and team lead, as well as Marc Gall, VP and A/L strategist, share a glimpse of recent client discussions.

Rising Interest Rates

As expected, the Fed recently began tightening monetary policy, projecting a significantly higher target rate ahead. As this cycle ages, it’s important to monitor the shape of the curve, as well as the relative performance across spread and risk assets. A key topic with clients involves how potential rate changes impact the balance sheet and investment portfolio, with Musbach and his team helping institutions anticipate and plan for all rate scenarios. Among considerations are effects of a flatter curve or deposit-to-loan pricing adjustments. “We ask if clients have a forward-looking, adaptable strategy to perform best in differing rate environments, as relying on current projections may prove costly,” said Musbach.

Persistent Inflation

Long considered stable, and recently “transitory,” inflation persists at 40-year highs. Though assumed to recede, variables for consideration include:

  • Will interest rate expectations change?
  • Will supply chain issues ease?
  • Will hiring accelerate?

As Musbach observes, the stock market or housing could react negatively, and an economic slowdown may occur. Alternatively, consumers may tap savings, heating up inflation.

Compressed Net Interest Margin

Financial institutions also must counter shrinking margins, as pandemic-related activity and fees only softened the blow of a worsening industry trend — and it’s important to consider any longer-term margin levers to pull.

“Our goal is to understand each individual institution, provide actionable insight and strategy, ultimately leading to decisions that suit the client, their goals and objectives best.” -Marc Gall.

For more information, please contact our Financial Institutions Group at 866-440-6515.

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