US banks benefit from higher Fed rates while keeping deposit rates low

The largest US banks are taking advantage of the Federal Reserve’s drive to raise interest rates, and to impose more fees on consumer loans and corporate credit lines without offering better rates on deposits to customers.

However, including the major lenders c. B. Morgan ChaseCitigroup and Wells Fargo made clear on Friday that the central bank’s tight policy could cost them in the long run, increasing provisions for potential credit losses from an economic slowdown.

Banks have done well by net interest income – the difference in what they pay on deposits and earn on loans and other assets. JPMorgan reported that the National Insurance Index hit $17.6 billion in the third quarter, up 34 percent year on year, a new record for the bank. Wales and City They reported their best NII numbers since 2019.

At the same time, banks are seeing high demand for many lending products as companies take advantage of lines of credit to store 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,” said Jason Goldberg, banking analyst at Barclays, referring to the 20 largest US banks by market capitalization.

JPMorgan and Wells both increased their full-year guidance for the NII: JPMorgan now expects its NII, excluding its trading division, to rise in 2022 by about 38 percent this year, while Wells expects it to rise 24 percent year-over-year. . Citi left its guidance unchanged, and forecast NII growth of $1.5 billion to $1.8 billion in the fourth quarter.

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

The negative consequences of Fed policy may come later. By increasing its benchmark policy rate to a target range of 3 percent to 3.25 percent from nearly zero in March, the central bank increased the chances of a recession. Periods of economic downturn are tricky for banks, because loan losses usually increase and spending slows.

Although banks used the quarter to set aside additional funds to cover potential credit losses, they also set an optimistic tone about their ability to withstand any downturn.

“We’re going to make very good returns in a recession,” JPMorgan CEO Jamie Dimon told analysts.

Lending activity is increasing as investment banking fees suffer from a significant slowdown in deal-making activity. At JPMorgan, investment banking revenue fell 43 percent year-over-year to $1.7 billion, while Citi’s fee was down 64 percent at $631 million.

Line chart of total US dollar loans showing JPMorgan and Wells Fargo step up in loan offering

“You’re seeing strong prevailing banking tailwinds that are mitigated by the banking headwinds on Wall Street,” said Mike Mayo, banking analyst at Wells Fargo, speaking on the industry broadly.

The question facing banks is whether they will be able to continue to enjoy favorable “trial deposits,” which measure how much interest rate hike the bank expects to pass on to customers with interest-bearing accounts. Deposits are usually the cheapest sources of bank financing.

More sophisticated clients such as corporations and financial institutions are more likely to convert their deposits into higher-return investments when interest rates rise. Corporate deposits in JPMorgan, Citi and Wells have fallen by about $120 billion over the past year, according to regulatory filings.

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

JPMorgan CFO Jeremy Barnum told analysts that test deposits are low by historical standards, in part due to the speed at which the Fed raised interest rates. However, several bank executives have warned that deposit rates will start to rise at some point in line with the broader interest rates.

“Once the Fed stops raising rates, you will notice a lag before deposit pricing starts to pick up,” said Mike Santomasimo, Wales CFO, on the bank’s earnings call. “This is normal and should be expected.”

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