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The largest U.S. banks are set to report bumper earnings from lending, taking advantage of the Federal Reserve’s interest rate hike as they prepare for a possible recession.
In its second-quarter earnings starting this week, analysts expect JPMorgan Chase, Bank of America and Citigroup to see an increase in net interest income – the difference between what banks pay on deposits and what they earn from loans and other assets.
“Main Street Banking has been under tremendous pressure over the last decade, with zero interest rates for most of that time. So it’s moving back to a more normal interest rate environment than it was a decade ago, “said Mike Mayo, a banking analyst at Wells Fargo.
Banks benefit from rising rates because they can raise loan charges more quickly than they take out payouts for deposits. Mayo predicts that the growth rate of net interest income from 2022 to 2024 will be the highest since 1980 as the Fed continues to raise rates this year to cope with inflation.
Demand for this specialty has grown significantly as a result of recent corporate scandals.
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JPMorgan will be the first bank to announce earnings on July 14, followed by Citi the next day, followed by BofA on July 18. Morgan Stanley and Goldman Sachs, whose businesses lean more towards investment banking and trade, reported earnings on July 14 and July 18, respectively. , Respectively.
While banks are benefiting from higher rates, the pace at which the Fed is raising rates is raising concerns about a U.S. recession over the next 18 months.
Bank stocks generally have the worst impact during a recession, and analysts expect that lenders will react to a darkening economic outlook by setting aside more capital to prepare for the risk of bad credit.
“So the real question is, how aggressively do they build reserves in anticipation of an economic downturn or a potential recession in the next 12 to 18 months?” Gerard Cassidy, a research analyst at RBC, said.