Traders work on the trading floor of the New York Stock Exchange (NYSE) on February 7, 2024 in New York City, the United States.
Brendan McDermid | Reuters
The benefits of scale will be most evident when banks begin reporting quarterly results on Friday.
Big banks have mostly fared better than smaller ones since the chaos of the regional banking crisis engulfed three institutions last year. This trend is set to continue, especially since expectations for the magnitude of the Fed’s interest rate cuts have dropped significantly since the beginning of the year.
Analysts said the changing interest rate landscape, dubbed a “secular move higher” as expectations for rate cuts swung from six to a possible three this year, would boost revenues for big banks while squeezing many smaller lenders, intensifying the concerns about the group and investors.
JPMorganThe largest U.S. lenders report earnings for the industry on Friday, followed by Bank of America and Goldman Sachs next week. on Monday, M&T Bank The release of the results is one of the first regional lenders to report on the period.
A focus for all of them will be how a shift in interest rate views will impact financing costs and commercial real estate loan holdings.
“There are a handful of banks that do a good job of managing the interest rate cycle, but there are a lot of banks that do a poor job,” he said. Christopher McGratyHead of Research, KBW Bank of America.
pricing pressure
for example, valley bankis a regional lender located in Wayne, New Jersey. Guidance given by the bank in January included expectations for seven interest rate cuts this year, which would allow it to pay lower rates to savers.
Instead, the bank may be forced to slash its forecast for net interest income because the cuts don’t materialize. Morgan Stanley Analyst Manan Gosalia has a sell rating on the company.
Net interest income is the money generated by a bank’s loans and securities minus payments on deposits.
After the collapse of Silicon Valley Bank last year, smaller banks were forced to pay out more deposits than larger banks, which were considered safer. The rate cut would provide some relief to smaller banks while also helping commercial real estate borrowers and lenders.
Gosalia said in an April 4 note that “if interest rates remain elevated for an extended period, Valley banks will face greater deposit pricing pressure than peers” and own more commercial real estate than other regional banks risk.
Meanwhile, for big banks like JPMorgan Chase, higher rates often mean they can take advantage of their funding for longer. They enjoy the benefit of earning higher interest on items such as credit card loans and investments during periods of rising interest rates, while typically paying lower interest rates on deposits.
UBS analyst Erika Najarian said JPMorgan Chase may increase its 2024 net interest income guidance by $2 billion to $3 billion, to $93 billion.
Large U.S. banks also tend to have more diverse revenue streams than smaller banks in areas such as wealth management and investment banking. Both should boost first-quarter results amid buoyant markets and a rebound in activity on Wall Street.
Commercial real estate exposure
In addition, larger banks tend to have much lower exposure to commercial real estate than smaller banks and generally have higher levels of loan loss provisions due to tighter regulations on the group.
That difference could be crucial this earnings season.
Concerns about commercial real estate, particularly office towers and multifamily housing, have dogged smaller banks ever since New York Community Bank Investors were stunned by the January disclosure of significantly higher loan provisions and broader operating challenges. The bank needed more than $1 billion in lifelines last month to help stabilize the company.
JPMorgan analyst Steven Alexopoulos said the New York central bank may have to cut its net interest income guidance as deposits and profits shrink.
A record $929 billion in commercial real estate loans are coming due this year, with about a third of the loans exceeding the underlying value of the properties, according to consultant Newmark.
“I don’t think we’re out of the woods yet in terms of the impact of commercial real estate on bank earnings, especially as interest rates remain elevated over the long term,” said Matt Stucky, chief portfolio manager for equities at Northwestern Mutual. at a higher level.”
“If you have a little bit of a hiccup in the credit experience in your commercial lending business, as is the case with NYCB, you’ll see it disappear very quickly,” he said.
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