A cura di Gabriele Malloggi
According to the most recent Q3 earnings report, major American banks seem to be maintaining stability. Despite a drop in consumer confidence in October and a surge in inflation expectations indicated by University of Michigan’s survey, businesses and individuals are persisting in their spending and borrowing patterns, even with interest rates at a 22-year high.
In the third quarter, JPMorgan Chase, Citigroup, and Wells Fargo collectively generated $49.6 billion in net interest income. This income, representing the difference between what banks pay on deposits and what they earn from loans and other assets, has significantly boosted the earnings for banks such as JPMorgan Chase, Citigroup, and Bank of America over the past 18 months.
These major banks have benefited from charging higher interest rates on loans in alignment with the Federal Reserve’s increase in benchmark rates, without significantly raising rates for savers. Initially, analysts had anticipated that only JPMorgan and Wells Fargo would experience increased profits in the third quarter compared to the previous year, but strong earnings have been observed across all banks.
However, concerns arise as significant banks report a decline in consumers tapping into their savings. Rising interest rates are also impeding lending growth for these major US banks. Additionally, there is pressure on banks to offer customers higher savings rates to retain their deposits, which serve as the primary source of funding for banks.
While major banks like JPMorgan and Bank of America accumulated record deposits during the pandemic, these amounts have been decreasing over the past 18 months due to the Federal Reserve’s rate hikes. Although these banks raised loan rates, they did not pass on the higher rates to savers, resulting in low deposit betas.
Furthermore, analysts predict that net charge-offs – the portion of loans marked as unrecoverable losses – will revert to pre-pandemic levels for JPMorgan, Bank of America, Citigroup, and Wells.
Despite the recent boost in earnings due to rising interest rates, this advantage is likely to transform into a barrier to growth. With the Federal Reserve indicating that rates will remain higher for a longer duration than previously anticipated, the benchmark 10-year Treasury yield has surged to 4,58% – its highest level since before the 2008 Global Financial Crisis. As rates increase, the pressure on consumers and businesses will also rise. Consequently, fewer customers will approach banks for loans, leading to a decrease in loan growth.
Meanwhile, banks have had to increase what they pay on deposits to attract cash from customers, many of whom utilized their savings from government pandemic programs designed to support the economy. With rising deposit costs and weakening loan growth, JPMorgan predicts that the industry’s net interest income in the third quarter fell by 3,5% compared to the second quarter. This decline is expected to accelerate into next year, with the sector’s net interest income projected to decrease by 2,7% after a significant 19,9% increase in 2022.
