US banks profit from Fed rate hikes while keeping deposit rates low

US banks profit from Fed rate hikes while keeping deposit rates low
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The biggest U.S. banks are benefiting from the Federal Reserve’s campaign to raise interest rates by charging more for consumer loans and corporate lines of credit without offering customers significantly better rates on deposits.

However, including leading lenders JPMorgan ChaseCitigroup and Wells Fargo said publicly on Friday that the central bank’s hawkish policy could cost them more in the longer term, raising provisions for potential loan losses from an economic downturn.

Banks’ results were flattered by net interest income – the difference between what they pay on deposits and what they earn on loans and other assets. JPMorgan reported NII of $17.6 billion in the third quarter, up 34 percent year over year, a new record for the bank. Wells and citi They reported their best NII numbers since 2019.

At the same time, banks are experiencing higher demand for many loan products as companies apply for lines of credit to build inventory and consumers borrow with credit cards.

“When all is said and done, we think this will be a record quarter for net interest income for our composite,” Barclays banking analyst Jason Goldberg said, referring to the 20 largest U.S. banks by market capitalization.

Both JPMorgan and Wells raised their full-year guidance for NII: JPMorgan now forecasts NII, excluding the trading division, to grow about 38 percent this year through 2022, while Wells expects it to grow 24 percent annually. Citi did not change its guidance, expecting NII to increase by $1.5 billion to $1.8 billion in the fourth quarter.

“In all three cases, it’s fair to say that net interest income beat our expectations and beat Street expectations,” said Chris Kotowski, an analyst at Oppenheimer in New York.

A line graph of net interest income in billions of dollars showing the growth of the lending business for US banks

The negative consequences of the Fed’s policy may emerge later. The central bank increased the chances of a recession by raising the near-zero interest rate to a target range of 3 percent to 3.25 percent in March. Economic downturns are treacherous for banks, as loan losses typically increase and spending slows.

While banks used the quarter to set aside additional funds to cover potential loan losses, they were positive about their ability to weather any downturn.

“We’re going to have pretty good returns in a recession,” JPMorgan Chief Executive Jamie Dimon told analysts.

Lending activity is picking up as investment banking fees suffer from a sharp slowdown in deal activity. Investment banking revenue at JPMorgan fell 43 percent year-over-year to $1.7 billion, while at Citi it fell 64 percent to $631 million.

Linear graph of total loans in $ tn showing JPMorgan, Wells Fargo accelerated lending

“You’re seeing strong core banking headwinds mitigated by Wall Street banking headwinds,” said Mike Mayo, banking analyst at Wells Fargo, speaking broadly about the industry.

The question for banks is whether they can continue to use their favorable “deposit betas,” which measure how much of a bank’s expected rate hikes will be passed on to customers with interest-bearing accounts. Deposits are usually the cheapest source of funding for banks.

More sophisticated customers, such as corporations and financial institutions, are more likely to shift their deposits to higher-yielding investments when interest rates rise. Corporate deposits at JPMorgan, Citi and Wells fell by about $120 billion over the past year, according to regulatory filings.

Given Citi’s smaller retail banking business compared to its peers, it relies more heavily on deposits from corporate clients, who are more price-sensitive. Citi’s net interest margin fell to 1.99 percent from 2.31 percent a year ago.

JPMorgan’s chief financial officer, Jeremy Barnum, told analysts that deposit betas are low by historical standards, in part because of the pace of Fed rate hikes. However, a number of bank executives have warned that at some point deposit rates will begin to rise further in line with broader interest rates.

Wells CFO Mike Santomassimo said on the bank’s earnings call: “Once the Fed stops raising rates, you’ll see a lag before deposit rates start to rise.” “It’s just normal and expected.”

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