Low rates, loan growth make profitability ‘stressed,’ agency notes in spring risk report

Bank profitability remains “stressed” due to low interest rates and loan growth, the federal regulator of national banks said Tuesday, pointing to increased credit risk as the financial impact of the coronavirus crisis continues to linger.

In its Semiannual Risk Perspective for Spring 2021, the Office of the Comptroller of the Currency (OCC) pointed to credit risk as one of four key themes affecting banks in the first part of the year.

While credit risk is higher, affecting some borrowers’ ability to service debts, the OCC also noted that assistance programs – as well as federal and local stimulus efforts – have suppressed loan “past due” levels.

The OCC, addressing the other three risk themes, said:

  • Strategic risks are elevated, particularly those associated with banks’ management of Net Interest Margin (NIM) compression and efforts to improve earnings. “Banks attempting to improve earnings may implement measures including cost cutting, increasing credit risk (both credit and investments) or extending duration,” the agency stated.
  • Operational risk is raised due to a “complex operating environment and increasing cybersecurity threats.”
  • Compliance risk is higher as banks’ expedited efforts to implement assistance programs continue to challenge established change management, product, and service risk management practices, OCC said.

The agency said the report also highlights the low-interest-rate environment as a special topic in emerging risks.

The report covers risks facing national banks and federal savings associations based on data as of Dec. 31, 2020, and covers five main areas: operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions.

OCC Semiannual Risk Perspective for Spring 2021