US banks eagerly await ‘bread and butter’ growth as economy rebounds

FILE PHOTOS: Signs of JP Morgan Chase Bank, Citibank and Wells Fargo & Co. Bank are seen in this combination photo from Reuters files. REUTERS/File Photos

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NEW YORK, Jan 27 (Reuters) – U.S. banks will enjoy stronger growth this year from their “bread and butter” business of taking deposits and lending money as the U.S. economy expands and that the Federal Reserve is preparing to raise interest rates for the first time. time in three years.

The Fed’s move could end the low interest rate environment that banks have faced for most of the past decade and, in particular, through the COVID-19 pandemic.

Net interest income, the difference between what banks earn on loans and payouts on deposits and other funds, has declined during the pandemic due to lower interest rates and a decline in borrowing . But that is about to change in 2022.

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The Fed announced on Wednesday that it would likely raise US interest rates in March. Fed funds futures forecast three more rate hikes later in the year. Read more

“Banks that over the last ten years haven’t been able to enjoy a stable yield curve are going to get it,” said Ken Leon, research director at CFRA Research, referring to the line that shows the interest rates demanded by buyers of public debt. lend over increasing terms.

“It is likely to generate significant net interest income growth in 2022.”

Net interest income accounted for 60% of revenue in the fourth quarter for the median bank among the top two dozen in the United States, said Barclays analyst Jason Goldberg. It was the lowest proportion in six years and down from 66% three years ago, before the pandemic and subsequent Fed rate cuts.

JPMorgan Chase & Co (JPM.N) told analysts earlier this month that net interest income from its businesses beyond securities markets could rise to $50 billion in 2022 from $44.5 billion. billion last year, an increase of 12%.

Wells Fargo & Co said its net interest income could rise 8%.

Some banks will benefit more than others based on their ability to hold low-cost deposits and use them to lend and invest in higher-yielding securities. Banks whose portfolios favor floating rate loans will benefit more.

“Some banks’ balance sheets are just more rate sensitive,” said Goldberg, who believes increases in net interest income will continue into 2023.

Bank of America Corp (BAC.N) executives weren’t as specific in their outlook when the bank released its results. But they said they expected the year to bring “robust growth” in net interest income, starting with “a few hundred million” more dollars in the first quarter on top of its 11 .4 billion in the fourth quarter.

Citigroup Inc (CN) executives said they would not provide net interest income estimates until an “investor day” on March 2. Chief Financial Officer Mark Mason, however, said the bank expects net interest income to be supported by higher global interest rates and putting more of its money into loans and titles.

Executives said the changing outlook for interest rates would make net interest income forecasts uncertain. But other factors also support an increase.

JPMorgan said the rate changes accounted for only about a third of the expected increase in net interest income. Most of the upside is expected to come from loan growth, he said.

Wells Fargo said the rate hike accounted for nearly two-thirds of the expected increase, with loan growth and balance sheet changes providing the rest.

With or without a Fed rate hike, net interest income will rise for the big banks, Jefferies analyst Ken Usdin said in a report.

Banks expect to lend more to businesses, especially those looking to build inventory after losing sales due to supply chain disruptions.

JPMorgan and Citigroup also said they expect more interest income from credit card users who start incurring interest charges again instead of paying down their balances as they did during the pandemic.

So far, executives have said they don’t expect more than modest increases in deposit rates.

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Reporting by David Henry in New York; Additional reporting by Michelle Price; Editing by Matt Scuffham and Jane Merriman

Our standards: The Thomson Reuters Trust Principles.

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