By David Henry
NEW YORK – 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 the Federal Reserve prepares to raise interest rates for the first time in three years.
The Fed’s move could bring an end to the low interest-rate environment which banks have faced for most of the past decade and, particularly, through the COVID-19 pandemic.
Net interest income, the difference between what banks earn from lending and pay out on deposits and other funds, declined during the pandemic due to interest rate cuts and a drop in borrowing. But this is about to change in 2022.
The Fed on Wednesday signaled it is likely to raise U.S. interest rates in March. Federal funds futures have priced in another three rate hikes later in the year.
“Banks that, for the last ten years, were not able to enjoy a steady yield curve are going to get it,” said Ken Leon, research director at CFRA Research, referring to the line that shows the interest rates buyers of government debt require to lend over increasing periods of time.
“It’s likely to provide significant growth in net income interest revenues in 2022.”
Net interest income accounted for 60% of revenue in the fourth quarter for the median bank among the biggest two dozen in the United States, said Barclays analyst Jason Goldberg. That 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 told analysts earlier this month that net interest income from its businesses beyond securities markets could increase to $50 billion in 2022 from $44.5 billion last year, a 12% increase.
Wells Fargo & Co said its net interest income could rise by 8%.
Some banks will benefit more than others depending on their ability to retain low-cost deposits and use them to lend and invest in higher-yielding securities. Banks with portfolios weighted toward 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 executives were not as specific in their outlook when the bank reported earnings. But they said they expected the year to bring “robust growth” in net interest income, starting with “a couple of hundred million” dollars more in the first quarter on top of its $11.4 billion in the fourth quarter.
Citigroup Inc executives said they would not provide estimates on net interest income until an “Investor Day” on March 2. Chief Financial Officer Mark Mason, however, said that the bank expects support for net interest income from higher global interest rates and from putting more of its cash into loans and securities.
Executives said the changing outlook for interest rates will make forecasting net interest income uncertain. But other factors also support an increase.
JPMorgan said changes in rates account for only about one-third of the increase it expects in net interest income. The bulk of the rise should come from loan growth, it said.
Wells Fargo said that higher rates account for almost two-thirds of the increase it expects with loan growth and balance sheet changes supplying the rest.
With or without higher rates from the Fed, net interest income will increase for large banks, analyst Ken Usdin of Jefferies said in a report.
Banks are expecting to lend more to businesses, particularly those who want to build inventories after losing sales to supply chain interruptions.
JPMorgan and Citigroup also said they expect more interest income from credit card users who resume incurring interest charges instead of paying down their balances as they have done in the pandemic.
So far, executives have said they do not expect more than modest hikes in deposit rates.
(Reporting by David Henry in New York; Additional reporting by Michelle Price; Editing by Matt Scuffham and Jane Merriman)