Lån med sikkerhet i bolig in net interest income was the primary factor for many banks’ quarterly results, and this was true for both Citigroup Inc. and JPMorgan Chase & Co., which saw their net interest income increase between 14 and 26% year over year. However, the banks’ fees made up a larger portion of their earnings. Nevertheless, lending income is still the most important part of their income, accounting for 61% of their revenue last quarter. Despite a slump in deal volume, Citigroup expects its NII to grow, thereby softening the effect of the slowdown in the economy.
Uncertainty surges in U.S. banks’ outlook for net interest income
Increasing interest rates have already had ripple effects on mortgage and auto lending rates. In addition, they are expected to dampen aggregate demand in light of moderate growth. Fed officials face the difficult task of balancing tight monetary policy while preventing an overheated economy or triggering a deep recession. Such a difficult task, called “engineering a soft landing,” remains a looming threat.
In the second quarter, banking activity was steady to slightly upbeat. While the outlook for loan demand remained muted, contacts said commercial loan applications increased. Increasing interest rates had prompted some commercial clients to contact their bank, which explains the moderate increase in home mortgage loan applications. Core deposit levels remained stable and are expected to decline in the third quarter. Credit standards are also becoming stricter across all loan categories.
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A recent survey found that U.S. banks have boosted their outlook for net interest income despite rising interest rates. Most contacts held a positive outlook for the economy, though one contact expressed concerns that future demand will be weaker than current levels. Other sources of concern include high prices, weak consumer sentiment, and increasing expectations of a recession in the near term. The survey also revealed that the outlook for net interest income is generally stable, but there is still no definite sign of a recession.
JPMorgan Chase & Co and Wells Fargo & Co are among the major banks boosting their outlooks for net interest income amid Fed rate hikes. Bank of America reported that its NII increased 21% year-over-year in the second quarter, with a further 12% growth expected for the third quarter. The growth in NII will offset declines in mortgage lending. Analysts seek guidance from bank executives about how the expected increases in interest rates will impact their asset and loan portfolios.
Fed willing to risk triggering a recession
Several U.S. banks have boosted their outlook for net interest income, or NII, this year, amid a steady rise in interest rates. Banks such as JPMorgan Chase & Co expect their net interest income to jump by as much as 26% this year compared to last year. Wells Fargo also expects NII to rise 7% in the third quarter and increase by more than $1 billion year-over-year. While NII is a key source of revenue for banks, it is also an important buffer against the decline in mortgage lending. Analysts track NII closely to gauge the impact of a bank’s increasing loan volume and the expected Fed rate hikes.
With monetary policy tightening in the United States, banks have been increasingly investing in agency securities in an effort to boost net interest income. While higher rates mean higher income for banks, these increases will squeeze net interest margins. And because banks must make more money to survive, they are planning to invest in agency securities, such as bonds issued by government agencies. They will likely raise rates in March as they seek to maintain liquidity.