US banks prep results as lenders adjust to higher-for-longer rates outlook
Investors will be keeping a close eye on how US banks are adjusting to the new higher-for-longer interest rates outlook this week, as a host of major American lenders line up to deliver their latest financial results.
JP Morgan, Citi and Wells Fargo kick off third quarter earnings season on Friday, with investors keen to understand how the new economic paradigm will impact lenders going forward.
With interest rates thought to be at or near their peak, central banks have increasingly signalled that interest rates will have to remain elevated for longer than markets previously expected in order to quash stubborn inflation.
“The focus will be on repercussions for interest rates to be higher-for-longer as well as potential signs of a long-awaited recession,” Herman Chan, banking analyst at Bloomberg Intelligence said.
The shift to a higher-for-longer narrative has triggered a rout in government bonds, which in turn means banks have racked up larger unrealised losses on their bond portfolios.
Unrealised losses are when assets decrease in value without yet being sold. Although the loss is only realised if the asset is sold, it means that banks have less capital at their disposal if it needs to sell assets.
But analysts at JP Morgan said that “concerns about capital seem overdone in the near term.”
Although rising interest rates have been a healthy tailwind for banks like JP Morgan and Citi, competition for deposits is now eroding lenders’ net interest margins – the difference between what a bank pays out and receives in interest payments.
Interest rates on offer to depositors at large US banks often lag rates available elsewhere, which has seen depositors shift funds across to higher-yielding assets.
So far investors have poured over $1trn into money market funds, putting the sector on course for a record year. Much of this money will have come from mainstream banks, although analysts at JP Morgan said “the pace of migration out of non-interest bearing deposits and increase in deposit betas seems to be slowing”.
Analysts at Barclays, said they expect “lower net interest income and reduced net interest margins” compared to the second quarter. Banks are also likely to increase provisions for credit losses, with loan losses “continuing to normalise”, the analysts said.
Investment banking income has remained weak this year, with market nervousness leading to a drop-off in dealmaking. Investors will be looking for any signs that the promised “green shoots” for dealmaking will materialise.
JP Morgan has looked stronger than ever this year, managing to beat expectations in both the first and second quarter. Its shares are up over five per cent over the year, unlike rivals Citi and Wells Fargo which are both down over five per cent.