Banks’ earnings are expected to fall despite gains from Fed rate hikes

Banks start the earnings season this week, with first-quarter results due to a series of industrial heavyweights led by JPMorgan Chase on Wednesday.

The latest quarterly figures are expected to precede a weak year for bank profits despite the expected boost from higher interest rates. According to projections compiled by S&P Global Market Intelligence, US banks’ earnings will fall by more than 8% in 2022 from last year, as the economic boost from the release of reserves that padded profits in 2021 diminishes.

“Earnings last year were driven so strongly by reserve releases – we saw earnings almost double year-on-year,” S&P Global Market Intelligence chief executive Nathan Stovall told Yahoo Finance.

Bank balances benefited last year from the release of credit losses from the COVID era, reserves financial institutions accumulated at the beginning of the pandemic to absorb the potential shock of borrowers not being able to pay their debts. As the economy recovered and the losses proved to be less severe than expected, large banks began to release these reserves, giving their earnings a meaningful boost.

In the third quarter of 2021, for example, JPMorgan Chase (JPM), the largest U.S. bank, saw quarterly revenues jump by more than $ 2 billion as it continued to release reserves previously set aside for possible defaults on loans during the pandemic. The megabank blew analysts’ forecasts to report a profit of $ 11.69 billion, which without $ 2.1 billion in reserve releases would have been $ 9.59 billion – largely unchanged from the previous year.

The JP Morgan Building in Central Hong Kong, Hong Kong, China, March 6, 2022. (Photo by Marc Fernandes / NurPhoto via Getty Images)

“We’re not going to get the same juice this year, and higher prices certainly help, but not enough to match that performance,” Stovall said. “During 2021, you saw reserves fall steadily, and as they fell, those falls hit the bottom line.”

A background of higher interest rates is set to increase the banks’ net interest income (the bank’s earnings on its lending activities and interest it pays to depositors) and net interest margins (calculated by dividing net interest income by the average income from interest-producing However, the boost may not be enough to match the tailwind that releases of reserves gave to banks’ earnings last year, when reserves fell by $ 58.1 billion from 2020 levels, according to S&P Global.

In addition, “mountains” of excess liquidity accumulated through an increase in consumer deposits during the pandemic, especially as lending activity remains lukewarm, continue to squeeze banks’ revenues – especially for commercial banks, where the extra cash lies on low-interest accounts and pulls net interest margins. Although S&P Global Market Intelligence expects an increase in lending growth, which will allow banks to spend some of the estimated $ 4 trillion in excess liquidity and improve margins, even if liquidity falls in 2022, 2023 and 2024, as the company expects, excess liquidity will remain over $ 3 trillion.

Excess liquidity is expected to decline in 2022, 2023 and 2024, but remain above $ 3 trillion as the economic recovery continues.

Excess liquidity is expected to decline in 2022, 2023 and 2024, but remain above $ 3 trillion as the economic recovery continues.

“Even if you just had an unprecedented growth in lending over the next few years, you would not return to a pre-pandemic level in terms of the loan-to-deposit ratio,” Stovall told Yahoo Finance.

With interest rate hikes and the Federal Reserve’s nearly $ 9 trillion balance sheet reduction, S&P Global Market Intelligence expects bank margins to grow by 21 basis points in 2022 to 2.69%, but the figure is likely to return to pre-pandemic levels in surplus of 3 , 30% until 2026.

While the Fed’s monetary tightening is expected to improve the bank’s net interest margins, and lending growth is ready to improve, margin increases will not be enough to offset the pressure from excess liquidity or the declining benefit of reserve releases on revenue – and banks’ earnings are expected to decline in 2022. consequence.

For most of the industry, however, the expected earnings growth and resulting returns will be seen as favorable by the industry, according to Stovall.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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