US banks gain from Fed rate hikes while keeping deposit interest low

The largest US banks are benefiting from the Federal Reserve’s campaign to increase interest rates, charging more for consumer loans and corporate lines of credit without offering customers significantly better rates on deposits.

However, leading lenders including JPMorgan Chase, Citigroup and Wells Fargo made clear on Friday that the central bank’s hawkish policy could cost them in the longer-term, increasing provisions for potential credit losses resulting from an economic downturn.

The banks’ results were flattered by net interest income — the difference in what they pay on deposits and earn from loans and other assets. JPMorgan reported NII of $17.6bn in the third quarter, up 34 per cent year-on-year and a new record for the bank. Wells and Citi reported their best NII numbers since 2019.

At the same time, banks are experiencing higher demand for many lending products as companies tap credit lines to stock up on inventory and consumers borrow on credit cards.

“When all is said and done, we think for our composite, this will be a record quarter for net interest income,” said Barclays banking analyst Jason Goldberg, referring to the 20 largest US banks by market capitalisation.

Both JPMorgan and Wells increased their full-year guidance for NII: JPMorgan is now forecasting that its NII, excluding its trading division, in 2022 will rise around 38 per cent this year, while Wells predicts it will rise 24 per cent year on year. Citi left its guidance unchanged, expecting to grow NII by $1.5bn to $1.8bn in the fourth quarter.

“In all three cases I think it’s fair to say net interest income beat our expectations and beat Street expectations,” said Chris Kotowski, an analyst at Oppenheimer in New York.

The negative consequences of the Fed’s policy could come later. By increasing its benchmark policy rate to a target range of 3 per cent to 3.25 per cent from near zero in March, the central bank has increased the chances of a recession. Economic downturns are treacherous for banks, because loan losses typically increase and spending slows.

Although banks used the quarter to set aside additional funds to cover potential credit losses, they also struck an upbeat tone on their ability to weather any downturn.

“We would have pretty damn good returns in a recession,” JPMorgan chief executive Jamie Dimon told analysts.

Lending activity is picking up just as investment banking fees are suffering from a dramatic slowdown in dealmaking activity. At JPMorgan, investment banking revenue fell 43 per cent year on year to $1.7bn, while at Citi fees were down 64 per cent at $631mn.

“You’re seeing strong mainstream banking tailwinds mitigated by Wall Street banking headwinds,” said Mike Mayo, banking analyst at Wells Fargo, speaking about the industry broadly.

The question facing banks is whether they will be able to continue enjoying favourable “deposit betas”, which measure how much of the rise in interest rates the bank expects it will pass on to customers with interest-bearing accounts. Deposits are typically banks’ cheapest source of funding.

More sophisticated clients such as corporations and financial institutions are more likely to move their deposits into higher yielding investments when interest rates rise. Corporate deposits at JPMorgan, Citi and Wells have declined by nearly $120bn over the past year, according to regulatory filings.

Given Citi’s smaller retail banking business compared with peers, it is more reliant on deposits from corporate clients that are more sensitive to price. Citi’s net interest margin declined to 1.99 per cent from 2.31 per cent a year ago.

JPMorgan chief financial officer Jeremy Barnum told analysts deposit betas were low by historical standards, partly due to the speed of the Fed rate hikes. However, several bank executives warned that at some point deposit rates would start rising more in line with broader interest rates.

“Once the Fed stops raising rates, you will see a lag before deposit pricing starts going up,” Wells CFO Mike Santomassimo said on the bank’s earnings call. “That’s just normal and to be expected.”