Big US banks sweat the move to lower interest rates
JPMorgan Chase was among the big banks to report that lower interest rates will squeeze profits in 2019.
NEW YORK: President Donald Trump’s attacks on the U.S. Federal Reserve cringe in financial markets, but his demand for zero interest is making banks sweat.
As the Fed reverses the course and prepares to cut the benchmark key rate for a second time on Wednesday, the major US banks have signaled that they expect a larger impact on their bottom line.
Banks such as JPMorgan Chase and Wells Fargo cut their 2019 interest rate earnings guidance for 2019 last week as central banks around the world ease monetary policy in response to weakening global growth prospects.
Lower interest rates mean less profit on loans made by banks, especially if they have offered higher returns on deposits to attract customers.
Moody’s warned in a report Thursday that lowering interest rates would reduce bank profitability in general and lead to more mergers in the industry.
JPMorgan Chase chief executive Jamie Dimon said last week that the bank now expects net interest income of around $ 57 million for the full year, a further revision to the down from forecast of $ 58 billion earlier in the year.
In July, the Federal Reserve cut the policy interest rate – which determines the cost of all types of borrowing – for the first time in more than a decade, after four rate hikes last year.
The reversal came amid Trump’s bitter trade war with China, which has increased uncertainty and undermined the global economy, fueling a slowdown in manufacturing and investment.
Trump has relentlessly called on the Fed to cut rates further to catch up with measures by the European Central Bank and others, calling for zero or even negative rates.
But most economists see this as highly unlikely, and Dimon said he still didn’t expect such a drastic move.
“I don’t think we’ll have zero rates in the United States,” Dimon said. “We were thinking about how to prepare for it, just in the normal course of risk management.”
Possible answers include reducing costs, as well as charging account fees to consumers.
– Overestimation of the impact –
Yet some banking experts claim that the interplay between interest rates and bank earnings is overstated in importance and more complex than is commonly believed.
“The drop in interest rates is manageable if we don’t have a recession,” said Marty Mosby, who heads the banking and stock market strategist at Vining Sparks, a brokerage firm.
And some banks have already put in place strategies to mitigate interest rate risk.
History shows that while bank profits may fall gradually after the Fed’s interest rate cuts, they do not completely collapse, said analyst Dick Bove, who points to many instances where profits have fallen. increased in a context of low interest rates.
“They are conglomerates and there are a lot of ways to make money,” he said, including charging corporate clients premiums due to the heightened risk of a recession.
Conversely, Bove said investors also benefited too much from the boost when rates rose and profits were diluted during the recent Fed rate hike cycle by large deposit payments.
The closely watched benchmark is “net interest income,” which essentially reflects the difference in bank income related to loans it makes and interest payments to depositors.
Wells Fargo also lowered its estimate of net interest income, forecasting a decline of $ 1.8 billion in the second half of 2019 compared to the same period last year.
The bank could put more of its own assets in longer-term investment vehicles if it expects rates to stay low for longer, a prospect that depends on “the perceived likelihood of a recession,” the bank said. Wells Fargo Chief Financial Officer John Shrewsberry.
“If you get into some kind of deeper economic decline and rates are going to stay low or go down from here… you are thinking of protecting the downside,” he said. “I don’t think we’re quite there yet.
Some banks have halted efforts to attract more deposits with higher interest rates than those offered by competitors.
“We have ditched high rate screens,” PNC Financial Services chairman William Demchak said, adding that the company has decided not to “fight deposits.”