Banks strategize pathways to interest rates insulation

Local banks are responding to an uncertain future interest rate environment by developing multifaceted strategies and working closely with their treasuries to insulate themselves.

Calixto Garcia-Velez, the president and CEO, said Banesco USA works with its treasury unit in “what is really a regulatory requirement of insulating the bank from significant shifts in rate upwards or downwards.”

“We work to have a more neutral position relative to interest rates and so, what we do is, we take positions as a bank in our treasury function that mitigate and offset the potential risks associated with dramatic interest rate moves,” he said.

Mr. Garcia-Velez added that banks go through a regular process where they analyze their loan portfolios as well as their deposit portfolios and the interest rate exposure, or risk, that they have. They then use financial products through the treasury department to help mitigate or offset the risks identified. For example, a bank can manage a mismatch between its loan portfolio (assets) and its deposit portfolio (liabilities) by buying products like swaps and derivatives that help hedge risk resulting from those differences.

“You have to consider, like I said, what’s the rate structure of your deposit portfolio, the rate on your loan portfolio, what are global geopolitical issues that are going on, things that are going on with the economy, whether it be unemployment or rate movement, so you need to factor in all of what’s happening around the world with a multifaceted approach to try to make the best decisions on how to hedge your interest rate, but there isn’t one best way to do it,” he said. “It depends on the circumstances.”

Sharymar Calderón, the senior executive vice president and chief financial officer of Amerant Bank, said the bank takes a proactive approach that involves modeling and stress testing to address interest rates.

“Now that we are expecting to continue the rates’ down cycle, we have done a couple of things that serve as hedging strategies to protect our net interest income,” Ms. Calderón said. “For example, we are repricing our deposits and we’re seeing most banks doing the same thing already. We’re also adding fixed rate yielding assets into our books, whether it’s through the investments portfolio or through the loan portfolio.”

In addition to those measures, she said, Amerant is looking at “multiple hedging strategies from a treasury perspective” as well as adding floors to variable rate loans so that they “have a floor to when that loan reprices.” They’re also protecting against refinance risk “to avoid having to refi and have a new loan at a lower rate.”

Ms. Calderón said that more measures are in place to protect areas aside from net interest income impacted by the changes in the interest rate cycle, such as credit.

“When we think about credits, we do something I call protecting our balance sheet through our doors, which is underwriting,” she said. “We want to make sure that we’re selective in terms of credits, that when we’re adding loans to our portfolio we think about our overall strategy of being a relationship first bank where we evaluate the overall or holistically the customer as we onboard them and that we understand the risk that we are taking, we stress test those credits and that we know it’s a risk we can manage going forward.”

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