Bank Earnings Will Rise With Interest Rates — But that’s Yellen And The Fed, Not Donald Trump


Date: 03.03.2018

It's entirely true that bank earnings are likely to rise substantially in the next few years. Some are describing this as a result of Donald Trump's coming ascendancy to the presidency but it's not really that at all. Instead it's the turning of the business cycle and the coming rises in interest rates that will do it and that's much more to do with Janet Yellen and colleagues at the Federal Reserve than it is to do with whoever is President. There might still be a small effect from spending plans but even those are really in the hands of Congress, not the executive. The important point here being that bank profitability is about the difference in interest rates, between what they pay and what they charge. And this near decade past has seen a deliberate squeeze on those margins--as the level of rates rises we will expect to see a widening of their interest rate margin.

So this is true:

Investors betting U.S. banks will reap huge profits as interest rates rise under Donald Trump were surprised Friday by just how optimistic the nation’s biggest lenders are about the year ahead.

Bank of America Corp. boosted its forecast for interest income, the money it gets from making loans and holding debt securities, predicting it’ll jump by about $600 million in the first quarter. Brian Kleinhanzl, an analyst at Keefe, Bruyette and Woods, told clients that’s more than he expected and will help the shares outperform. JPMorgan Chase & Co. also sounded a note of confidence, and financial stocks rose more than other sectors.

The effect is going to be there, definitely, it's the cause ascribed there which I think is at variance with the evidence.

As interest rates creep higher and the president-elect promises fewer regulations, the outlook for U.S. banks appears bright.

Optimism for financiers’ rosier future was abundantly reflected in quarterly earnings released by some of the nation's largest banks Friday as Bank of America and JPMorgan Chase beat analysts’ earnings estimates.


As my colleague Antoine Gara points out, JP Morgan's results were good:

Expense cuts combined with an adrenaline shot of growth fueled by rising interest rates is proving to be a potent combination for American banks.

However, as I say, this has not a lot to do with President-elect Donald Trump. This is about rising interest rates, little else.


A bank lives by the difference in interest rates, the margin. It has to pay some amount to attract money into the bank, those deposits, and then it charges some amount, the interest on loans going out the door. A bank is doing maturity transformation too--they borrow short and lend long. That's really their economic function in fact. And short term money is near always cheaper than long term money. Thus, as they transform that short term set of deposits into those long term loans they create a margin for themselves. Excellent--but the size of that margin is hugely influenced by the level of interest rates. The higher nominal interest rates are the larger the margin the bank will be able to make.

And of course economic policy over this past decade has been all about pushing down nominal interest rates to near nothing, hasn't it? And what we're seeing now, as the Fed raises rates however so gradually, is an unwinding of that artificially low margin that the banks have been able to charge.

Thus it is entirely true that the banks are likely in for a good time in the future. But it's not so much about Trump as it is really just about that turn in the business cycle and thus monetary policy.

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