Top US banks brace for lowest lending incomes in almost 2 years

Investors are preparing for big US banks to report their lowest income from lending in almost two years as they grapple with the end of the Federal Reserve’s era of high interest rates.

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are together expected to report total net interest income of just under $62bn when they unveil quarterly results in the coming weeks, a decline of close to 5 per cent from the third quarter of 2023.

Net interest income — the difference between what banks pay on deposits and what they earn from loans and other assets — boomed when the Fed raised rates rapidly from the start of 2022 and banks raised rates for savers more slowly than for borrowers.

But the boom has started to fizzle out this year, with banks slowly increasing rates for savers, compressing profit margins.

The third-quarter net interest income total across the four largest US lenders by assets is expected by analysts to be the lowest figure since the end of 2022.

Analysts are anticipating that third-quarter total net profit across the four banks will fall by an average of about 15 per cent from a year earlier, according to Bloomberg data.

The banks’ earnings announcements will be a preview “for net interest income going forward into year end and into 2025”, said Saul Martinez, a banking analyst at HSBC.

The profits banks make from loans are expected to come under further pressure after the Fed cut interest rates for the first time in more than four years last month, with more cuts forecast.

Investors have already reduced their expectations for some banks’ earnings. Last month, a top executive at JPMorgan spooked investors by warning that analysts were too optimistic about what it would earn in 2025 from net interest income. This sent shares in the largest US bank by assets down more than 5 per cent.

Analysts had forecast that JPMorgan’s net interest income for 2025 would decline from $91.5bn to $90bn but they have now cut their estimates for next year to $89bn.

Part of the issue for JPMorgan — the industry’s biggest beneficiary from higher interest rates — is that it has held a higher proportion of assets in short duration or cash-like securities. These were earning larger returns when interest rates were high, but will be less lucrative following the Fed’s rate cut.

BofA, meanwhile, put a larger portion of the consumer deposits it did not lend out into securities and these declined in value as the Fed raised interest rates, hurting profits. Although those investments have weighed on the bank’s share price over the past two years, their prices are now set to rise as rates decline, making them less of a drag on BofA’s earnings.

“Our thesis was always that [JPMorgan] benefited a lot when rates were going up just because of how their balance sheet was positioned,” said Suryansh Sharma, a research analyst at Morningstar. “Now when rates will come down, [JPMorgan] would be at the biggest disadvantage” among the big banks.

JPMorgan and Wells are the first to report results on October 11, followed by BofA and Citi on October 15.

The banks’ overall profits will be hit by the lower net interest income as well as higher provisions for potential loan losses, compared with the year before. Losses from loans at banks have been steadily increasing, albeit from very low levels, as consumers have burnt through their pandemic-era savings and the cost of living has climbed.

“Credit’s been so good and generally pretty resilient in a slowing economy. The indications are that it should continue that way,” said HSBC’s Martinez.

“But these are banks, and occasionally banks have hiccups, even during good times. And I think we’ve become so complacent about credit that any hiccups might be viewed pretty negatively.”

Loan growth has been sluggish as higher interest rates have deterred borrowers, with the exception of credit card lending. Analysts are hoping that lower interest rates could spur households and businesses to take on more debt.

“There’s a lot of firepower in the balance sheets to originate more loans,” said Morningstar’s Sharma.

They would be less affected by a squeeze on net interest income because their business models are more skewed towards investment banking, trading and money management.

Goldman’s third-quarter profits are forecast to rise by 26 per cent from last year, when earnings were hit by its retreat from retail banking. At Morgan Stanley, where new chief executive Ted Pick has been in place since January, net income is expected to rise by about 12.5 per cent.

The anticipated rebound in dealmaking activity has also boosted smaller independent advisers, such as Evercore and Lazard. Along with Goldman, the three firms have all outperformed the KBW Bank index and the benchmark S&P 500.