Despite the asset-sensitive
nature of South African banks, we do not forecast that moderately rising interest rates will translate into gains, as increasing funding costs, low growth, and competition for quality credits will likely consume much of the additional margin," it said.
Third quarter 2010 earnings reflect a modest increase in the net interest margin despite pressure associated with the historically low interest rate environment and the company's asset-sensitive
balance sheet, and an increase in the provision for loan losses.
Our balance sheet continues to be asset-sensitive
, that is, we currently expect net interest income to increase should interest rates rise.
In addition, we are currently structured as asset-sensitive
, and in a falling rate environment, when loan income is falling due to lower rates, the mortgage activity is a natural hedge, as mortgage companies usually perform better under those circumstances.
The impact of the asset-sensitive
balance sheet is reflected in the 2008 year-to-date decline in loan yield of 92 basis points compared to a 55 basis point decline in average cost of deposits.
Our second quarter performance reflects continued growth in our core commercial and home equity loan portfolios and deposits during a difficult economic environment, specifically as it relates to the current level of interest rates and our asset-sensitive
balance sheet,' said Philip R Sherringham, president and chief executive officer.
The thirteen prime rate increases totaling 300 basis points during 2004 and 2005 have also had a positive effect on earnings since the bank's interest rate risk position continues to be asset-sensitive
Our balance sheet is asset-sensitive
, so our loan yields have responded more rapidly to the Federal Reserve rate cuts than our cost of funds.
The eight prime rate increases totaling 175 basis points during the fourth quarter of 2004 and the first nine months of 2005 also had a positive effect on earnings since the bank's interest rate risk position is asset-sensitive
Compression in the net interest margin, which was affected by the substantial reductions in short-term interest rates the Federal Open Market Committee (FOMC) has made since September 2007, and by the company's asset-sensitive
interest rate risk position.
These improvements to net interest income were offset by the effect of the 25 basis point decline in the average prime rate during the course of the last twelve months, as a result of our asset-sensitive
This decrease was driven by a decline in interest rates, which puts margin pressure on asset-sensitive
banks like NewDominion, and by an increased loan loss provision.