U.S. banks gear up for big lending gains but face end of rate hike cycle

As the Federal Reserve’s rate-hiking cycle draws to a close, investors fear unexpected gains are nearing a peak this year.

The Fed’s efforts to combat inflation by tightening monetary policy Bankcould charge borrowers for loans without significantly increasing the interest rate paid to depositors.

This has increased their so-called net interest income, the difference between what they pay for their deposits and what they get from loans and other assets. Analysts estimate that JPMorgan Chase, Bank of America, Citigroup and Wells Fargo together will generate about $60 billion in interest income in the final quarter of 2022, up 30% from a year earlier. Increased.

But investors and analysts say the pace of the Fed’s rate hikes will slow, putting more pressure on depositors to pay more for deposits as customers shop for the best rates, so banks will see net interest rates rise. Sustaining rapid revenue growth will be difficult, he said.

Deposits are the primary source of funding for lenders to finance loans.

“I think 2023 is going to be a big shift from tailwind to headwind for the industry,” said Scott Schiefers, a banking analyst at Piper Sandler. “I think we will take this further [Fed] Tightening cycle and moving further up [in rates], it will become increasingly difficult for banks to keep deposit costs down. ”

As Wall Street banks prepare to take profits in the face of a sharp slowdown in investment banking earnings, lower profits from lending could wipe out the seldom-seen silver lining. I would put it away. Staff reduction.

Lending prospects will be a key focus when JPMorgan, BofA, Citi and Wells Fargo report earnings on Jan. 13. goldman sachs Morgan Stanley, which relies heavily on investment banking, trading and asset management, follows suit with earnings on Jan. 17.

Overall fourth-quarter earnings for the six large banks are expected to remain flat year-over-year, but analysts expect earnings per share to decline by about 25% on average.

Wall Street banks were hit by a sharp slowdown in investment banking last year. Goldman Sachs, JP Morgan, Morgan Stanley, BofA and Citi—his top five investment banks by market share—each expect investment bank revenues to fall about 50% year-over-year.

A downturn in investment banking has heightened Wall Street’s scrutiny of big banks’ lending operations.

Chris Kotowski, managing director of research at Oppenheimer, said: “The market remains concerned and there are still many concerns about whether net interest margins and net interest income have peaked.

There is usually a lag of several months between banks raising interest rates on loans and pressure from customers to raise interest rates on deposits. This will hurt the profitability of banks’ net interest income.

Barclays banking analyst Jason Goldberg said: “The significantly higher profit margins will level off in 2023.

As the Federal Reserve signaled last month that it would continue to raise rates this year (although economists expect it to be more slowly), investors are watching the early signs of stress from borrowers and the big money market on loans. We are eager to hear insights from banks. become worse.

So far, banks have said most U.S. consumers are sitting on surplus savings accumulated during the pandemic and a debt crisis is months away.

“I think it’s a bit like waiting for godotMr Kotowski said: ”. U.S. banks gear up for big lending gains but face end of rate hike cycle

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