Biggest Banks Feel Fed Pain as Lower Rates Start to Hit Revenue
(Bloomberg) -- Jamie Dimon compared the fickleness of banks’ biggest revenue source to the wind. For the first time in years, it’s blowing against them.
Dimon’s bank, JPMorgan Chase & Co., snapped a three-year streak of quarterly increases in net interest income -- revenue from customers’ loan payments minus what the bank pays depositors -- and said it will fall further in the second half of 2019. Wells Fargo & Co. posted its smallest lending income since 2016, while Citigroup Inc.’s net interest margin hit the lowest in five quarters.
Banks’ traditional lending businesses have profited from the Federal Reserve’s march upward that began in late 2015, as they passed on the higher rates to borrowers while keeping deposit rates low. Investors have fretted about how they’ll handle the turnabout, causing bank stocks to trail the broader market despite record earnings and buybacks.
“Efficiencies can only get you so far -- the core business has to grow,” Krishna Memani, Invesco Advisers vice chairman of investments, said in a Bloomberg Television interview. “The core banking part of BofA, JPMorgan, Wells Fargo is so large that that’s what drives their stock prices.”
Fed Chairman Jerome Powell last week opened the door to a July cut in interest rates, citing a cooling global economy and trade friction. That’s a reversal from the start of the year, when investors were betting the central bank would boost rates. The market hasn’t waited for the Fed to move, as benchmark rates have been dropping for months.
U.S. banks are still at an advantage to many of their global rivals, as European and Japanese lenders are grappling with negative rates instead of just lower ones. And the bull case is that lower rates spur more borrowing, though that hasn’t materialized yet at JPMorgan and Wells Fargo.
“Lower rates will increase loan volume while stabilizing interest margins,” said Jan Schildbach, head of bank research at Deutsche Bank AG in Frankfurt. “So net interest income will continue growing for U.S. banks, but at a slower rate.”
The banks’ lending businesses have bolstered revenue at a time when Wall Street trading desks are suffering. JPMorgan posted its fourth straight trading-revenue decline in the second quarter, while Citigroup has seen three consecutive drops. Goldman Sachs Group Inc., whose consumer business is still a fraction of the size of rivals, surprised investors Tuesday with a jump in equities trading that helped it beat earnings expectations.
JPMorgan on Tuesday reduced its annual forecast for NII to about $57.5 billion, after saying in April it could increase to more than $58 billion. Executives said that figure could fall further if the Fed cuts rates three times this year.
Wells Fargo had already lowered its outlook in April, saying NII could drop 2% to 5% this year. Chief Financial Officer John Shrewsberry said Tuesday the drop will be close to 5%, assuming one or two Fed rate cuts this year. Citigroup said Monday that each 25 basis point cut by the Fed will reduce revenue by about $50 million a quarter. Bank of America Corp. reports second-quarter results on Wednesday.
Still, banks say they won’t let the shifting environment change their strategic plans. Looser restrictions on growth and lower tax bills have led several of the biggest lenders to start expansions into new regions.
“NII is like the wind blowing,” Dimon, JPMorgan’s chief executive officer, said on a call with journalists. “We’re opening branches, that is not the wind. That is serious expansion of business. Of course, we can’t predict the future any better than you can.”
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