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Bank earnings kick off after another period of rising rates, bad loans


Jamie Dimon, Chairman of the Board and Chief Executive Officer of JPMorgan Chase & Co., gestures as he speaks during an interview with Reuters in Miami, Florida, U.S., February 8, 2023. 

Marco Bello | Reuters

American banks are closing out another quarter in which interest rates surged, reviving concerns about shrinking margins and rising loan losses — though some analysts see a silver lining to the industry’s woes.

Just as they did during the March regional banking crisis, higher rates are expected to lead to a jump in losses on banks’ bond portfolios and contribute to funding pressures as institutions are forced to pay higher rates for deposits.

KBW analysts Christopher McGratty and David Konrad estimate banks’ per-share earnings fell 18% in the third quarter as lending margins compressed and loan demand sank on higher borrowing costs.

“The fundamental outlook is hard near term; revenues are declining, margins are declining, growth is slowing,” McGratty said in a phone interview.

Earnings season kicks off Friday with reports from JPMorgan Chase, Citigroup and Wells Fargo.

Bank stocks have been intertwined closely with the path of borrowing costs this year. The S&P 500 Banks index sank 9.3% in September on concerns sparked by a surprising surge in longer-term interest rates, especially the 10-year yield, which jumped 74 basis points in the quarter.

Rising yields mean the bonds owned by banks fall in value, creating unrealized losses that pressure capital levels. The dynamic caught midsized institutions including Silicon Valley Bank and First Republic off guard earlier this year, which — combined with deposit runs — led to government seizure of those banks.

Big banks have largely dodged concerns tied to underwater bonds, with the notable exception of Bank of America. The bank piled into low-yielding securities during the pandemic and had more than $100 billion in paper losses on bonds at midyear. The issue constrains the bank’s interest revenue and has made the lender the worst stock performer this year among the top six U.S. institutions.

Expectations on the impact of higher rates on banks’ balance sheets varied. Morgan Stanley analysts led by Betsy Graseck said in an October 2 note that the “estimated impact from the bond rout in 3Q is more than double” losses in the second quarter.

Hardest-hit banks

Silver linings



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