This Quarter, Bank Earnings Are All About Rates
October 13 2019 - 8:29AM
Dow Jones News
By Liz Hoffman and Ben Eisen
Investors will get an early readout on the impact of the Federal
Reserve's recent interest-rate cuts when big U.S. banks report
third-quarter earnings this week.
JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup
Inc. and Wells Fargo & Co. report results Tuesday. Bank of
America Corp. follows on Wednesday and Morgan Stanley on
Thursday.
Large banks' earnings are decent proxies for the economy, so
they are closely watched. Like the economy, they are sensitive to
moves in baseline interest rates, which the Fed has cut twice since
July to combat a worried-about slowdown in hiring and
production.
Lower rates eat into banks' profits by crimping what they can
charge on loans. Banks can pay depositors less -- and some are,
particularly for online-only accounts that court wealthier savers.
"We've dropped off the high-rate screens," PNC Financial Services
Group Inc. Chief Executive Bill Demchak said last month. "We don't
need the money," he added. PNC will report its results on
Wednesday.
But big commercial banks can't always reprice deposits fast
enough to offset the falling loan revenue. The difference between
what U.S. banks earned from loans and what they paid for deposits
has fallen for the past two quarters from a six-year high.
On the plus side for banks, lower rates can spur mortgage
borrowing and other lending. Loan growth, which had slowed sharply
in 2016 and 2017, began ticking back up this year.
Interest-rate moves in either direction can gin up work for
banks' traders, as investment funds and corporate clients enter
into new transactions to protect themselves or speculate on future
movements. Products tied to global interest rates, like government
bonds and swaps, make up the biggest portion of banks' fixed-income
trading revenues, which are steadily declining.
U.S. economic data are showing signs of weakness. Manufacturing
has slowed, and regulators are worried that trade tensions between
the U.S. and China could hamper hiring. Any economic slowdown could
bring to an end the yearslong boom in credit, where banks churned
out steady, low-risk profits from lending to consumers and
businesses.
Already some are packing sandbags: U.S. banks set aside $12.8
billion to cover expected loan losses during the second quarter, 9%
higher than a year earlier, according to Federal Deposit Insurance
Corp. data.
Financial-company stocks in the S&P 500 are up about 4.7%
over the past year, compared with an 8.9% increase in the broader
index. In the third quarter, they put in a middle-of-the-pack
performance, rising 1.4%, barely more than the broader index.
Write to Liz Hoffman at liz.hoffman@wsj.com and Ben Eisen at
ben.eisen@wsj.com
(END) Dow Jones Newswires
October 13, 2019 08:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.