This Quarter, Bank Earnings Are All About Rates

Date : 10/13/2019 @ 12:29PM
Source : Dow Jones News

This Quarter, Bank Earnings Are All About Rates

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.


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