Rising U.S. interest rates may not boost bank profits by as much as many executives and investors hope, JPMorgan Chase & Co Chief Executive Jamie Dimon said on Tuesday.
Investors expecting the Federal Reserve to lift rates this year have purchased U.S. bank shares, helping them perform much better than the overall U.S. stock market. Rising rates allow banks to charge higher rates on their loans, which can boost their income.
But higher rates can also increase a bank's costs, in particular, the interest that they have to pay depositors.
In past business cycles, higher costs could take some time to kick in. Banks could be slow in paying higher rates to depositors, because customers were often reluctant to complete the paperwork necessary to switch their money to a different bank.
But this time, it will be easier for depositors to move money around online and with their mobile phones. JPMorgan believes it will have to be faster to offer more interest to retain depositors, Dimon said.
"We're assuming that whatever happened in the last cycle, this one will be worse," Dimon said in a conference call with analysts after his bank posted quarterly results.
"In other words, we will gather less of the benefit from rates going up than we have in the past," Dimon said.
If Dimon is right, investors could be disappointed as banks struggle more than expected to generate revenue increases from higher rates.
Analyst Chris Mutascio of Keefe, Bruyette & Woods said some banks will likely find they have to pay more than others to keep deposits. Banks with more deposits resting in checking accounts will have an advantage, because customers are often reluctant to switch banks and re-enter all their bill payment information.
Customers may also hesitate to switch deposits if they use the same bank for multiple services, Mustacio said.