Big banks report strong profits on rising interest rates, but the good times may not last

Big banks report strong profits on rising interest rates, but the good times may not last

Big banks report strong profits on rising interest rates, but the good times may not last

The Fed’s tight monetary policy, pushing interest rates to multi-year highs, helped big banks make big gains on customer deposits. But those gains may not last as interest rates are near their peak and a recession looms.

A rising interest rate environment is generally bad for households and businesses that borrow money. But it is good for the banks because they profit from the increase in the “net interest rate differential”.

It’s the growing difference between what banks pay depositors and the interest they receive for investing that money in government securities like treasury bills. For example, before the Fed started raising interest rates, banks paid nearly 0% interest on checking and savings accounts and earned less than 1% by investing the funds in treasury bills. American. In recent months, banks are still paying close to 0% interest on deposits or, in some cases, close to 1% and collecting close to 5% in Treasury bills.

It’s a much larger spread that’s helping banks print money, as evidenced by fourth-quarter earnings reports released on Friday. For example, JPMorgan’s net interest income climbed 48% for the quarter from a year earlier.

“Banks managed to exceed profit targets today, despite a slowdown in overall transaction activity such as home mortgages and initial public offerings,” said David Donovan, executive vice president of services. of digital consultancy Publicis Sapient, to International Business Times. “JPMorgan Chase beat expectations, reporting better-than-expected quarterly profit on a strong performance. Profit rose 6% and revenue jumped 18%. Debt looks reasonable.”

Still, banks face several headwinds that could close the money printing window. One is that interest rates are skyrocketing at a time of increasing competition for funds, which means a decline in the net interest rate spread.

Another headwind is weakening demand for home loans, as rising mortgage rates have wreaked havoc on the housing market. In addition, banks charge high fees for issuing and servicing household loans for home purchases.

Then there’s the weakening US economy, which could further depress demand for mortgages. In addition, it will increase default rates in both the consumer market and the mortgage market, forcing banks to build up more reserves to cover these losses.

Wells Fargo has already seen its profits halved from the year-ago quarter due to a significant decline in its mortgage banking unit and the need to build reserves for potential loan losses. Citigroup faced a similar, albeit better, situation than Wells Fargo, which also faced regulatory issues.

“We are seeing positive fourth quarter results for most banks, but almost all of them have highlighted significant headwinds to success in 2023, including inflationary pressures and a looming recession,” said to IBT David Keller, Chief Market Strategist at .

Webull CEO Anthony Denier expressed similar concerns.

“They continue to struggle with inflation, Fed rate hikes and concerns about a slowing global economy,” Denier told IBT. “However, higher interest rates generated a lot more interest income, which helped their bottom line, but they need to build provisions for larger loan losses if the economy slides into recession. “

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