U.S. banks make different bets on interest rate directions

The largest US bank is pursuing a dramatically different strategy to deploy trillions of dollars in government debt markets, highlighting the Wall Street debate over interest rate directions.

On the one hand is Bank of America, the second largest US lender in assets. This helped boost third-quarter earnings by raising interest from the debt securities portfolio, which has grown 77% over the past year and is now close to $ 970. bn.

The other is JP Morgan Chase, the largest bank in the United States. JPMorgan Chase has a small investment securities portfolio and tends to deposit deposits in the Federal Reserve rather than wasting on potentially high-value government bonds and agency securities.

The divergence strategy added a note of inconsistency in the earnings season when all major banks benefited from the trading boom on Wall Street — and determine which lenders are more profitable on the other side of the Covid-19 pandemic. May help you.

Jason Goldberg, a bank analyst at Barclays, said: “Time tells us which is more appropriate than the others.”

The dilemma for banks is that government stimulus and quantitative easing programs have been deployed during the health crisis, making it difficult to use all the deposits on the balance sheet.

Lending money would be their preferred option. However, loan growth has slowed as businesses find sufficient liquidity in the bond market and consumers repay their debt with credit cards.

Purchasing Treasury bills or mortgage-backed securities gives banks some yield, but it also carries other risks. If rising inflation leads to higher interest rates, they need to mark down the value of bonds in their “for sale” portfolio and miss the opportunity to spend cash on more profitable lending opportunities. I will end up.

BofA responded last year by stepping up bond purchases, a move that paid off in the third quarter. Net interest income increased by 10% on Thursday, despite a 3% decline in loans. In contrast, JP Morgan increased by 1% and Citigroup and Wells Fargo decreased by 1% and 5%, respectively.

Mark Cabana, Head of US Interest Rate Strategy at BofA, said: “Bank bids on the Treasury are expected to be ongoing and very strong.”

In contrast, JP Morgan has expanded its debt securities portfolio by only 3% over the past year. Citigroup and Wells Fargo increased by 14% and 12%, respectively.

Column chart of rate of change assets since the third quarter of 2020 showing that JP Morgan and Bank of America have taken different approaches to managing deposits so far

Jamie Dimon, CEO of JP Morgan, said he was concerned that Treasury prices could fall. “It’s hard to justify the price of US debt,” he said in an April letter to shareholders.A few months ago he said, “I won’t touch it.” [Treasuries] With a 10-foot pole. “

Bank Chief Financial Officer Jeremy Burnham said Wednesday that he was “happy to put up with excess deposits” but said he was likely to start investing sooner.

Wells Fargo also signaled that it was willing to wait. Banks began buying more bonds in the first half of this year, but retreated to bystanders as interest rates began to rise. Compared to the second quarter, its investment portfolio was stable.

“Our view now is that there is more … We think there will be more opportunities to expand in the future because of the risk of rising interest rates in the medium term,” said Chief Financial Officer. Mike Santo Masimo told reporters.

Such precautions are costly in the short term. According to Barclays Goldberg, if JP Morgan and Wells Fargo invested additional cash at 1.5%, pre-provisioning revenue could increase by 7% and 5%, respectively, from what they reported in the quarter.

However, rising interest rates could put the Treasury at a disadvantage to banks and create a negative feedback loop in the market.

Jennadi Goldberg, US Senior Rate Strategist at TD Securities, said: “So I think the risk really lies in the financial market.”

Additional Report by Joshua Franklin of New York

U.S. banks make different bets on interest rate directions

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