As US banks battle interest rates, loans may be silver lining

The Fed’s recent rate cuts will be in the spotlight when the big banks kick off the third-quarter earnings season this week.

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Citigroup, Goldman Sachs, JPMorgan and Wells Fargo are set to report ahead of Tuesday’s opening bell while Bank of America and Morgan Stanley will release their results in the days that follow.

TickerSecurityLastChangeChange %
CCITIGROUP INC.73.91-0.91-1.22%
GSGOLDMAN SACHS GROUP INC.217.91-2.13-0.97%
JPMJP MORGAN CHASE & CO.129.63-0.95-0.73%
WFCWELLS FARGO & COMPANY53.54-0.49-0.91%
MSMORGAN STANLEY49.10-0.23-0.47%
BACBANK OF AMERICA CORP.32.69-0.25-0.76%

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“We expect a weak 3Q, led by a steep fall in rates and slower loan growth but tempered by swift cuts in the deposit rates and sharp growth in securities portfolios, especially Treasuries,” wrote a New York-based team of bank analysts at JPMorgan in an Oct. 10 note to clients.

The Fed in September cut rates for the second time this year. The rate cuts, which were the first in over a decade, will provide a hit to net interest margin, or the spread between interest income earned from their borrowers and the amount of interest paid out to their lenders, at U.S. banks.

“We expect net interest margins (NIM) to be down at all banks QoQ and down at a faster rate QoQ by 8bp on average, with loan growth as a partial or full offset to NIM at some banks,” JPMorgan analyst Vivek Juneja wrote.

That loan growth could be a silver lining for the banks as they experience a boost of loan originations. A Goldman Sachs research team expects loan growth to accelerate by 50 basis points in the quarter to a 3 percent year-over-year rate.

The increase in loan volume is expected to help partially offset the drop in revenue caused by lower interest rates.

Speaking at the Barclays Global Financial Services Conference on Sept. 10, JPMorgan CEO Jamie Dimon said the bank’s net interest income would be about $57 billion, down from his July forecast of $57.5 billion, due the damage from the Fed’s rate cuts. Other banks also lowered their forecasts.

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“About a year ago, I thought rates would be heading up, not down,” Dimon said.