Interest Slump
A drop in loans and the Fed’s near zero-interest rate policy is starting to weigh on banks’ revenue. Net interest income at the four largest banks has fallen more than $2 billion in each quarter of 2020, and dropped to the lowest in more than five years in the three months through September.
Typically when rates fall, the rising loan demand allows banks to expand lending and keep interest income at least stable. This time it’s a double whammy: lower rates and less lending.
While Bank of America predicted that the third quarter would be the low point for its net interest income, Wells Fargo & Co. executives warned that their firm could see further declines in 2021.
Part of the decline has come from banks being cautious in deploying the flood of deposits they’ve received in recent months. Cash, Treasuries and other securities effectively guaranteed by the federal government now make up more than 35% of the combined balance sheets of the 25 largest U.S. banks, the biggest share in Federal Reserve records going back to 1985.
JPMorgan CEO Jamie Dimon said his firm wouldn’t take more risk just to boost its interest income.
“We have $300 billion of cash we could invest today,” Dimon told analysts on Tuesday. “We’re not going to invest in stuff making 50 basis points, 60 basis points, or 70 basis points so we get a teeny little bit more of NII. We’re going to make long-term decisions for the company and if your NII then gets squeezed a little bit so be it.”
-With assistance from Max Abelson.
This article was provided by Bloomberg News.