Likely Trends Are Shaped by a Dynamic Rate Environment The top issues facing executives managing credit portfolio risk and the balance sheet at financial institutions are shaped largely by the dynamic rate environment, according to Abrigo’s outlook for major trends in the year ahead. Based on comments from the Abrigo Advisory Services team and our bank and credit union clients, executives will have their work cut out to manage profitability, balance sheet growth and credit risk. Both groups were recently asked to identify top priorities and trends ahead, and many pointed to efforts to manage the various impacts of still-high interest rates — even before Fed officials indicated they could reduce the number of potential rate cuts in 2025 from previous expectations. Interest rate uncertainty will mean banks and credit unions focus on understanding and managing interest rate risk, pricing and customer behavior related to prepayments and deposits, Abrigo’s advisors say. Advisors and customers alike say growing deposits will be a primary focus, especially for institutions looking to grow and manage funding costs. Several customers also say that lowering non-interest expenses and optimizing institutional processes are top priorities in 2025. Here’s a quick look at some trends and issues likely to affect banks and credit unions this year. Priority: Managing the Risks of Interest Rate Uncertainty Abrigo experts have noticed a growing shift in clients’ concerns toward interest rate risk, so one focus will be managing that. Dave Koch, managing director of Abrigo Advisory Services and a lead faculty member of the Graduate School of Banking at the University of Wisconsin-Madison, said that with additional rate cuts, financial institutions could face a squeeze on net interest margin spread. “The deposit side may see continued pricing pressures, with CD and savings rates potentially remaining higher than pre-crisis levels,” he said. “On the lending side, loan rates are expected to follow prime rates down, but the spread over prime may remain higher due to lingering credit risk concerns.” As a result, banks and credit unions will face challenges in managing repricing risk (both for loans and deposits that need to be repriced at lower rates). “Stability of funding will be a critical focus, so institutions need tools to price risks accurately on both loans and deposits,” Koch said. Neekis Hammond, Abrigo’s vice president of sales and professional services, agreed that rate-related topics will continue to shape the commercial banking landscape. “Managing the profitability of loans and deposits in a volatile interest rate environment will be a key focus” for banks and credit unions, he said. Focusing on the Economy, Credit Risk and Allowances Another rate-related issue that managers of credit portfolio risk management will face is economic uncertainty. Still-elevated interest rates are running into declining consumer purchasing power, which stands to add pressure to credit risk. As a result, Abrigo advisors and customers say managing loan portfolio stress will be a top 2025 issue. Financial institutions with high concentrations in specific segments, such as consumer lending and especially commercial real estate (CRE), will need to proactively manage risks through stress testing, early intervention and adjustments to loan loss provisioning. Some Abrigo customers named managing watch-list loans and complying with new stress test reporting as among their institutions’ top priorities this year. 2025 Credit Portfolio Risk and Balance-Sheet Management Outlook By Mary Ellen Biery, Senior Strategist & Content Writer, Abrigo Colorado Banker 16
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