Two of the largest banks in the United States, JPMorgan Chase and Wells Fargo, are poised to kick off the earnings season for lenders this Friday. This quarter has been notably unique for the U.S. financial system, characterized by volatile market conditions and the Federal Reserve’s first interest-rate cut in over four years.
Federal Reserve Rate Cut Impact
The Federal Reserve’s significant interest rate cut, implemented in mid-September, will likely have minimal impact on the third-quarter results. However, investors are eager to understand how this new phase in the rate cycle may affect banks for the remainder of 2024 and into the following year.
Lower interest rates can have mixed consequences for banks’ financial performance. On one hand, banks will benefit from lower interest payments on deposits, but they may also see a decline in the interest income from variable-rate loans. Additionally, fixed-rate loans already on banks’ balance sheets could increase in value, but the cash and cash equivalents they have accumulated will generate less interest.
Ongoing Effects of Previous Rate Increases
In recent quarters, banks have been grappling with the repercussions of the Fed’s previous rate hikes. For many institutions, the costs associated with higher deposit interest rates have outpaced the income generated from loans and securities.
Unrealized Gains and Losses
In the past few years, banks were caught off guard by the Fed’s aggressive strategy to combat inflation through rapid rate increases. This led to a significant decline in the value of many government bonds and mortgage-backed securities that banks had purchased at lower rates, resulting in substantial unrealized losses on their balance sheets.
While most banks have not yet had to realize these losses, some regional lenders did in 2023 due to urgent sell-offs to manage deposit withdrawals. With interest rates now on a downward trend, the carrying value of these securities is expected to gradually rise, helping to erase those paper losses.
Investment Banking Activity
The largest banks are less reliant on traditional lending, thanks in part to their robust investment banking divisions. These units generate significant fees by advising corporations on mergers and acquisitions, as well as facilitating stock and debt issuance.
After a slump over the past two years, investment banking activities have shown signs of recovery in 2024, as the economy has avoided a recession and stock markets have rebounded. Banks are optimistic about strong results this quarter, with falling rates likely encouraging companies to pursue new opportunities and increase borrowing for strategic investments.
Trading Revenue from Market Volatility
The third quarter was marked by market volatility, which should translate to solid trading revenue for major banks. While corporate executives expressed growing confidence in their businesses and the economy over the summer, many consumers experienced increased anxiety regarding job security and economic conditions.
Credit Card Delinquencies
An increase in credit card delinquencies has been observed, particularly among lower-income consumers. Many major card-issuing banks reported higher rates of delinquency in July, with more borrowers carrying balances month-to-month. While some lenders noted that these trends had stabilized earlier in the summer, concerns about consumer spending resurfaced in August following the revelation that the nation’s unemployment rate had risen to its highest level in nearly three years. Although the unemployment rate has since improved, it remains elevated compared to last year.
Conclusion
As JPMorgan Chase and Wells Fargo prepare to report their earnings, the financial sector is bracing for a quarter influenced by fluctuating interest rates, market volatility, and evolving consumer behaviors. Investors will be keen to glean insights into how these dynamics will shape the banks’ performance moving forward.
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