Near-zero interest rates aren’t hurdles for just insurance companies.
Banks also are feeling the squeeze as low rates have cut into their profit margins.
“You have two things—the interest rate compression and regulators putting more burdens on companies,” said Scott Kavanaugh, chief executive of Irvine-based First Foundation Bank. “There’s not much we or any bank can do about it. The question is how to diversity away from that interest margin. [Income] has to come from fee revenue.”
Banks across the board were initially given a boost when the Federal Reserve cut the short-term interest rate, because they were able to borrow at cheap rates while collecting interest on existing loans that had been made at higher rates. Now many are seeing dents in their margins resulting from low rates tacked onto newer loans.
Kavanaugh said First Foundation is fortunate to have nontraditional sources of income already in place, including its trust services, insurance and wealth management divisions.
“Frankly, if we didn’t have that, I’d be very, very concerned,” he said.
Construction is a sector that’s feeling the trickle-down effects of struggling banks, as the industry in large part depends on the availability of financing from banks and other sources, said Clark Welton, a partner based at the Irvine office of Seattle-based accounting firm Moss Adams LLP.
Welton heads the Southern California real estate practice.
“As recently as 2007 and 2008, you had the environment when operators and owners were doing deals with 85% financing,” he said. “Now those 85%-days are long gone. I think the low rates come with higher levels of expectation. You’re not able to borrow as much … and get the construction and development loans that you used to.”
Buyers, on the other hand, are able to use the low rates in their favor.
“The people who are out there buying, as long as they’re well qualified and have the right type of equity behind them to come up with the necessary upfront amount, they’re able to get cheap financing,” Welton said. “But it’s the developers who are faced with the difficulty in getting construction loans. There will be a time when supply will be so short that it will make more and more sense for banks … to come to the table.”
Low rates no doubt affect the way individual investors look for places to put their money, said Tom Blanchfield, a managing director of investments at the Newport Beach office of Merrill Lynch Wealth Management.
Blanchfield is one of the top four wealth managers in Orange County, according to a list published by the Business Journal in March. He also was named No. 100 among the top wealth advisers in California, ranked by Barron’s magazine. His team manages about $1.55 billion of assets.
“While [the low rates are] a benefit to debtors, you have a cost to savers,” he said. “It should induce savers to take a little bit more risk with their cash.”
Blanchfield said he’s seen many clients who have embraced nontraditional investments such as collectible automobiles, land, paintings and gold.
“It’s not an unwillingness to hold traditional investments,” he said and cited the benefit of receiving dividends from common stocks of healthy companies versus costs associated with holding nontraditional assets such as maintenance expenses for high-end cars.
“Investors are aware of those things, and they don’t want to have their whole portfolios in just those assets,” Blanchfield said. “The key for [wealth managers] is to make sure they don’t get too heavily allocated in one investment class.”
—Jane Yu
