Olympia noting in the annual report that they are exposed to interest rate risk as the cash portion of the off-balance sheet arrangements ($1.00 billion), from which Olympia Trust earns trust income.
2023 Earnings this year were $21 million... according to the Annual report (pg 26) if rates change +/-1% it is estimated that Olympia’s after-tax earnings for the year increase/decrease $7.69 million (noting prime rate at 7.2%)
So rates drop to 6.2 % and earnings drop over 33%?! Is this not essentially a bet on rates at this point or am I missing something?
I guess reading annual reports could pay off (as knowing this when rates were on the rise with no slowdown coming would have been beneficial)
Thanks for your Input
It is true that OLY’s earnings is sensitive to the movement of interest rates, OLY’s net earnings could drop/increase by around 33% if rates move in a positive/negative direction. This sensitivity to interest rates is common for financial companies that earn interest on a large investment holding (such as brokers, insurance). In the near term, OLY’s earnings could face a headwind due to a decrease in rate, that said, OLY has done really well over the last interest rates cycle. Also, the company’s service revenue is more predictable. This is an inherent risk of investing in financial companies that we think investors should get comfortable with. But we think over the long term of 5 years, it is management execution that counts, not the absolute movement in interest rates.