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Big banks benefit from higher interest rates.The market therefore assumes that persistently high consumer prices will Delay rate cut For investors in JPMorgan Chase (JPM) and Wells Fargo (WFC), the Fed’s interest rate cut is not a bad thing) and Citigroup (C). All three companies are due to report first-quarter earnings on Friday and may signal a shift in monetary policy in their favor. Still, smaller rivals will have a hard time turning inflationary lemons into lemonade.
Much of what the big banks do is simple. They make money from interest on loans and securities and lose money from interest paid to savers and other providers of finance. The income gap, known as net interest income, hit an all-time high in 2023. Big lenders have braced investors for the boost to fade. But that was before inflation was significantly above the Fed’s 2% target.Investors are now pricing in a 10% probability that the central Banks are not cutting interest rates at all this year, according to central bank CME Group’s Federal Reserve Watch Tools; A month ago, implied odds were close to zero.
When interest rates rise, or at least don’t fall, the result is essentially free, as lenders’ revenues rise rapidly but are slow to pass on higher interest rates to savers. JPMorgan said last year that net interest income should normalize to around $80 billion, but analysts at Morgan Stanley ( MS ) now expect that number to rise to just over $84 billion. After deducting and taxing the difference, the bank’s return on tangible common equity would increase by nearly 2 percentage points, which was already as high as 21% last year. Such stimulus would be more welcome at Citigroup, where boss Jane Fraser’s performance in 2023 is a dismal 5%.
There is good news from elsewhere, too. Bank valuations have fallen due to upcoming new banking rules, known as “Basel Endgame,” that could raise capital requirements by a fifth, cutting returns.JPMorgan CEO Jamie Dimon said regulators may water down the rules or even redo them after industry backlash Tips for the week.
But on the next level, there wasn’t much cheering.So-called regional banks also benefit from interest income, but there are Borrowers are under great pressure Worry. Easing policy would have provided relief: Suffering property borrowers’ loans often followed base rates. Even if Basel is watered down, banks with more than $100 billion in size may still face some new rules that were previously reserved for the largest banks for the first time. The KBW Bank Index (KBWB) has gained 4% over the past three months, but its regional bank index has fallen 11%. Beyond the giants of the industry, a sour taste lingers.
Background news
The largest U.S. banks will report first-quarter earnings on April 12. JPMorgan Chase, Wells Fargo and Citigroup are all expected to report earnings falling from a year earlier, according to LSEG. Bank of America is also expected to report lower quarterly earnings on April 16. However, analysts at Morgan Stanley said JPMorgan is expected to raise its interest income guidance for this year. The largest banks derive most of their revenue from interest on loans and securities, offset by interest payments on deposits and other funds. U.S. consumer price data released on April 10 showed that the annual inflation rate in March was 3.5%, compared with 3.2% last month. The Fed’s target interest rate is 2%, and above-target inflation could slow its pace of rate cuts. Federal Reserve officials in March predicted a 3 percentage point interest rate cut in 2024.
Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
