Here's a term to add to your investing vocabulary: asset sensitivity.
This has been used a lot by bank executives over the last few months to describe the positioning of their loan books compared to the changing interest rate environment. If a bank says that it's "asset sensitive," it means its loan yields are more sensitive to short-term interest rates as opposed to long-term rates.
KeyCorp and asset sensitivity
Of all the banks that have discussed asset sensitivity, none seems to be more focused on it than KeyCorp (NYSE:KEY).
The company's chief financial officer, Donald Kimble, said on the most recent earnings call:
While Key, along with other asset-sensitive banks, generally benefit from a rise in both short-term and long-term rates, the duration and characteristics of Key's loan and investment portfolio position us to realize more benefit from a rise in the shorter end of the yield curve.
Chief Executive Officer Beth Mooney added more substance to the point in an appearance on CNBC in October. "You know, we are actually more tied to the short end of the curve," Mooney said on Mad Money, "70% of the loan book and balance sheet is tied to either the overnight or 30-day rate."
Another way of saying this is that 70% of KeyCorp's loans are variable rate.
So, why does this matter?
To be clear, this matters very little on a relative basis. As Kimble intimated, KeyCorp isn't the only bank that's asset sensitive. Even a cursory glance at most big bank balance sheets would lead one to conclude that virtually all of the nation's largest lenders are similarly situated -- I say this because the majority of loans on bank balance sheets are commercial in nature, and thus more likely to be variable rate.
On an absolute basis, however, it matters a lot. In the middle of November, outgoing Federal Reserve Chairman Ben Bernanke announced that the federal funds rate (from which short-term rates derive) is "likely to remain near zero for a considerable time after the asset purchases end, perhaps well after the [6.5%] unemployment threshold is crossed."
As a result, while the yield curve may indeed steepen over the next few quarters if the central bank begins to ease off the quantitative easing accelerator, this will provide little comfort to lenders like KeyCorp that are asset sensitive and thus dependent predominantly on higher short-term rates to boost revenue and profitability.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.