Ask an expert: Top priorities for 2024

“Which measurements would you put highest priority on in 2024?”

I’d say that Net Interest Margin (NIM) changes and Economic Value of Equity (EVE) should continue to be the primary focus of IRR management in 2024. Gap calculations rarely give the full picture (focused on timing of reprice, and not magnitude), and duration measurements can be difficult to understand. Given the extreme rate increases in the past couple of years and the bank failures in 2023, all financial institution managers and directors should have a clear understanding of how future market rate changes could impact both shorter-term earnings (aka the NIM in the next one and two years) and longer-term capital values (aka the EVE).

As market rates jumped dramatically in 2022, most financial institutions saw nice increases in their NIMs. Balance sheets were filled with shorter-term assets like Fed Funds sold, short-term securities, and variable rate loans. When market rates increased, income on these assets skyrocketed. At the same time, the liquidity in the banking system was still quite strong from the previous pandemic-related stimulus programs and curtailed consumer spending. As a result, banks and credit unions were slow to increase deposit rates, which in turn, led to widening margins and strong earnings for the better part of 2022.

 

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