As Banks Report Earnings, Fed Looks to Take Away the Punch Bowl
July 14 2019 - 12:29PM
Dow Jones News
By Telis Demos
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 telis.demos@wsj.com
(END) Dow Jones Newswires
July 14, 2019 12:14 ET (16:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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