America’s biggest banks will report another quarter of bumper profits from lending this week, a windfall investors fear will near its peak this year as the US Federal Reserve’s rate rise cycle draws closer to its end.
The Fed’s effort to combat inflation by tightening monetary policy has been a boon for banks, which have been able to charge borrowers more for loans without raising the interest rates they pay depositors by as much.
This has boosted their so-called net interest income — the difference in what they pay on deposits and what they earn from loans and other assets. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo together generated interest income for the final quarter of 2022 of almost $60bn, up 30 per cent from a year ago, according to analysts’ estimates.
However, investors and analysts say banks will find it harder to sustain such rapid growth in net interest income as the Fed lifts rates less quickly and customers increase the pressure on them to pay more on deposits as they shop around for the best rates.
Deposits are the main source of funding for lenders to bankroll their loans.
“It strikes me that 2023 will largely be one of inflection, mostly from tailwinds to headwinds for the industry,” said Scott Siefers, banking analyst at Piper Sandler. “I think the further along we get in this [Fed] tightening cycle and the further we move upwards [in rates], the tougher it’s going to be for banks to keep down their deposit costs.”
Smaller profits from lending would damp what has been a rare bright spot for Wall Street banks as they confront a sharp slowdown in investment banking revenues and prepare to make job cuts.
The outlook for lending will be a key focus when JPMorgan, BofA, Citi and Wells Fargo report earnings on January 13. Goldman Sachs and Morgan Stanley, which are more reliant on investment banking, trading and asset management, follow with results on January 17.
Overall fourth-quarter revenues at the six big banks are expected to be flat compared with a year ago, while earnings per share are forecast to drop by an average of about 25 per cent, analysts estimate.
Wall Street banks were hit last year by a sharp slowdown in investment banking. Goldman, JPMorgan, Morgan Stanley, BofA and Citi — the five largest investment banks by market share — are each expected to report year-on-year declines of about 50 per cent in investment banking revenues.
The depressed picture for investment banking has sharpened Wall Street’s scrutiny of the big banks’ lending businesses.
“The market is still worried and there is still a lot of concern about whether we’re at the peak in net interest margins and net interest income,” said Chris Kotowski, managing director of research at Oppenheimer.
There is typically a lag of several months between banks raising rates on loans and facing pressure from customers to pay more interest on their deposits, which would eat into banks’ profit margin on net interest income.
“Margins, which have seen meaningful expansion, should plateau during 2023,” said Barclays banking analyst Jason Goldberg.
With the Fed signalling last month that it will continue to raise interest rates this year — though economists expect it to do so more slowly — investors will be eager to hear any insights from the big banks on early signs of stress from borrowers and indications of loans turning bad.
So far, banks have said that most US consumers are sitting on surplus savings stored up during the pandemic and any debt crunch is months away.
“I do think it’s going to be a little bit like Waiting for Godot,” Kotowski said, “in the sense that they’re gonna tell you: ‘Yeah, we know you’re all concerned about what’s going to happen with credit quality, but we’re not going to know for another six or nine months’.”