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Investors will look for signs of how much the Fed's policy shift could hurt earnings
By Telis Demos
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 15, 2019).
What goes up must come down.
Rising interest rates have boosted bank earnings for several years, but those days are over. Federal Reserve Chairman Jerome Powell signaled recently that the central bank is ready to cut rates.
Big banks start reporting second-quarter earnings Monday, and investors will be closely watching for signs of how much the Fed's change in rate policy could hurt the banking business.
Banks make money by charging more on loans than what they pay on deposits. This net interest margin is a core measure of profitability.
When the Fed began raising rates in late 2015, net interest margin grew as banks repriced loans faster than depositors demanded more interest. A boom in bank earnings followed.
That long expansion came to an end this year after the Fed signaled it would pause rate increases because of concern about an economic slowdown. That made it harder for banks to raise their loan rates, but consumers and companies continued to demand higher and higher deposit rates, putting a squeeze on banks.
The question is how much margins could fall. Some banks have taken defensive measures that could blunt the impact of the rate pause. Ally Financial Inc. and Goldman Sachs Group Inc. recently lowered the rates they pay on online savings deposit accounts.
Another driver of profit narrowing for banks is the increasingly small difference between long- and short-term interest rates.
Banks generally borrow at lower, short-term rates and lend at higher, long-term rates. But as the rate curve flattened, meaning those rates converged, it became harder for banks to make money. Flat curves are also typically an indication that investors expect the economy to slow, which would be bad news for banks.
One thing working in banks' favor has been that borrowers have remained healthy. The rate at which banks have written off bad loans for nonpayment has inched higher over the past few years. But it remains at a historically low level despite some economists' concern that consumers and companies have too much debt relative to the strength of the economy.
Bank stocks haven't kept up with the broader market's surge over the past year. In addition to worries about rates, investors are concerned that banks' trading revenue will sag for a third straight quarter.
Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. all said during the course of the second quarter that their trading revenue was on track to fall in the second quarter from a year earlier. Though stocks are surging, bankers say their clients have remained cautious and are spooked by political issues such as the U.S.'s trade disputes with China and Mexico. As a result, banks say, clients aren't paying them to put on big new bets.
Also, banks' net income will grow more slowly than it did last year, when the benefits of a 2017 corporate tax cut came into effect.
Citigroup kicks off the major banks' quarterly earnings reports on Monday, followed by Goldman Sachs, JPMorgan and Wells Fargo & Co. on Tuesday; Bank of America on Wednesday; and Morgan Stanley on Thursday.
Write to Telis Demos at firstname.lastname@example.org
(END) Dow Jones Newswires
July 15, 2019 02:47 ET (06:47 GMT)
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