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Commentary By Reade Ben

Economics Newsletter: Banking's Concerns Over Future Income

Economics Finance

Banks are worried about the future of their interest income. 

JPMorgan Chase, Wells Fargo, and Citigroup posted first-quarter profits and revenues that exceeded expectations. However, these banks are concerned about future performance.

As the chart below shows, the quarterly net interest margin for FDIC-insured institutions has been relatively stable since a post-COVID rebound. However, the future interesting earnings of banks (and their earnings at large) might be challenged by prolonged high-rate environment. 

Inflation is still high, and thus so are interest rates. Banks might see the income they earn from lending overshadowed by the payments they make for deposits. This could present a problem for regional banks specifically, which more heavily rely on lending income. 

The high-rate environment has also adversely impacted mortgage activities at larger banks, which are struggling with fewer originations. Additionally, consumers seeking to profit from higher rates might take their business and money elsewhere. This would impact any bank's earnings. 

Current, strong bank earnings have been muted by a skeptical outlook on future performance. This mirrors the present state of the economy. Job growth and increased consumer spending appear to be positive indicators of a vibrant economy. However, these indicators are also keeping inflation and rates high. Subsequently, the longer-term consequences of “higher for longer” might not be as rosy as present performance suggests. 

Source: Gina Heeb and Justin Baer, WSJ; FDIC

Reade Ben is a policy analyst at the Manhattan Institute.

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