Jamie Dimon, Chairman of the Board and Chief Executive Officer of JPMorgan Chase & Co., gestures as he speaks during an interview with Reuters in Miami, Florida, U.S., February 8, 2023.
Marco Bello | Reuters
American banks are experiencing another quarter affected by the surge in interest rates, raising concerns about shrinking margins and increasing loan losses. However, some analysts see a silver lining amidst the industry’s challenges.
Similar to the regional banking crisis in March, higher interest rates are expected to lead to an increase in losses on banks’ bond portfolios and contribute to funding pressures as institutions are required to pay higher rates for deposits.
KBW analysts Christopher McGratty and David Konrad estimate that banks’ per-share earnings declined by 18% in the third quarter due to compressed lending margins and decreased loan demand resulting from higher borrowing costs.
“The fundamental outlook is challenging in the near term; revenues and margins are declining, and growth is slowing,” McGratty stated in a phone interview.
Earnings season begins on Friday with reports from JPMorgan Chase, Citigroup and Wells Fargo.
Bank stocks have closely followed the path of borrowing costs this year. The S&P 500 Banks index declined by 9.3% in September due to concerns sparked by a surprising surge in longer-term interest rates, particularly the 10-year yield, which increased by 74 basis points in the quarter.
Rising yields result in a decrease in the value of bonds owned by banks, leading to unrealized losses that put pressure on capital levels. This situation caught mid-sized institutions like Silicon Valley Bank and First Republic off guard earlier this year, resulting in the government seizing control of those banks.
Big banks have mostly avoided concerns related to underwater bonds, with the exception of Bank of America. The bank unwisely invested in low-yielding securities during the pandemic and incurred over $100 billion in paper losses on bonds at midyear. This issue constrains the bank’s interest revenue and has made Bank of America the worst-performing stock this year among the top six U.S. institutions.
Expectations regarding the impact of higher interest rates on banks’ balance sheets vary. Morgan Stanley analysts led by Betsy Graseck stated in an October 2 note that the “estimated impact from the bond rout in 3Q is more than double” the losses in the second quarter.
Hardest-hit banks
Bond losses will have the greatest impact on regional lenders such as Comerica, Fifth Third Bank, and KeyBank, according to the Morgan Stanley analysts.
However, other factors could mitigate the capital impact of higher rates for most banks, as stated by KBW and UBS analysts. “A lot will depend on the duration of their bonds,” Konrad mentioned in an interview, referring to whether banks hold shorter or longer-term bonds. “I think the value of the bonds will resemble last quarter, which is still a capital headwind, but there will be a smaller group of banks that are more affected by what they
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