High interest rates will put pressure on small players

The benefits of scale will never be more evident than when banks begin reporting quarterly results on Friday.

Since last year’s regional banking crisis that hit three institutions, larger banks have generally fared better than smaller ones. This trend is set to continue, especially since expectations for the extent of the Federal Reserve’s interest rate cuts have fallen sharply since the start of the year.

The changing interest rate picture, dubbed “higher and longer” as expectations for rate cuts this year shift from six cuts to possibly three, will boost earnings for big banks while squeezing many smaller ones, adding to the group’s concerns, analysts said. according to analysts. and investors.

JP Morgan ChaseThe country’s largest lender will announce industry profits on Friday, followed by Bank of America And Goldman Sachs next week. On Monday, M&T Bank releases results, being one of the first regional lenders to report for the period.

The focus of all of them will be how changing views on interest rates will affect financing costs and commercial real estate lending volumes.

“There are some banks that have done a very good job of managing the interest rate cycle, and there have been a lot of banks that have done it wrong,” he said. Christopher McGrattyHead of US Banking Research at KBW.

Let’s take for example Valley Bank, a regional lender based in Wayne, New Jersey. The bank’s guidance in January included expectations of seven rate cuts this year, which would allow it to pay lower rates to depositors.

Instead, the bank may be forced to lower its forecast for net interest income because the cuts will not materialize, according to Morgan Stanley analyst Manan Gosalia, who has a sell rating on the company.

Net interest income is the money a bank receives from loans and securities minus the amount it pays on deposits.

After a Silicon Valley bank failed last year, smaller banks were forced to pay more on deposits than larger ones, which are considered safer. Lower rates would provide some relief to small banks and would also help commercial real estate borrowers and their lenders.

Valley Bank will face “greater deposit pricing pressure than its competitors if rates remain high for an extended period of time” and will have more exposure to commercial real estate than other regional banks, Gosalia said in an April 4 release.

Meanwhile, for big banks like JPMorgan, higher rates typically mean they can take advantage of their funding benefits longer. They take advantage of earning higher interest rates on things like credit card loans and investments made during high-rate times, while typically paying low rates on deposits.

JPMorgan could raise its 2024 net interest income forecast by about $2 billion to $3 billion, to $93 billion, UBS analyst Erica Najarian said.

Large U.S. banks also tend to have more diverse revenue streams than smaller ones, from areas such as asset management and investment banking. Both of these factors should help boost first-quarter results as markets recover and activity returns on Wall Street.

Moreover, large banks tend to have much less exposure to commercial real estate risk compared to smaller players and tend to have higher levels of loan loss provisions due to tighter regulation of the group.

This difference could prove critical this earnings season.

Concerns about commercial real estate, particularly office buildings and apartment buildings, have dogged smaller banks ever since. New York Community Bank stunned investors in January with the disclosure of significantly higher loan provisions and wider operational problems. The bank needed a more than $1 billion lifeline last month to help the firm stabilize.

NYCB may have to cut its net interest income forecast due to shrinking deposits and margins, according to JPMorgan analyst Stephen Alexopoulos.

A record $929 billion in commercial real estate loans are coming due this year, and about one-third of the loans are for more than the value of the underlying property, according to consulting firm Newmark.

“I don’t think we’re out of the woods in terms of commercial real estate rearing its ugly head on bank earnings, especially if rates stay high for a long time,” said Matt Stuckey, chief equity portfolio manager at Northwestern Mutual.

“If there is even a hint of problems associated with the credit experience of your commercial lending operation, as was the case with NYCB, you have seen how quickly it can slip away from you,” he said.