Bank Earnings Preview: High Interest Rates Favor Large Banks Over Smaller Competitors

📝 SUMMARY: The upcoming bank earnings season is set to highlight the diverging fortunes between the U.S.'s largest financial institutions and its smaller regional players. This disparity is largely driven by the prevailing high-interest rates, which have been termed "higher for longer" as the Federal Reserve scales back on the expected number of rate cuts from six to potentially just three this year. Such an environment tends to favor big banks like JPMorgan Chase ($JPM), Bank of America ($BAC), and Goldman Sachs ($GS), all scheduled to report results starting this Friday.

These larger banks benefit from their significant scale and diversified revenue streams, including wealth management and investment banking, which are less sensitive to interest rate fluctuations. Additionally, they typically offer lower deposit rates while reaping higher returns on loans and investments made during periods of elevated rates, thereby boosting their net interest income. For example, JPMorgan is anticipated to raise its 2024 net interest income guidance by $2 to $3 billion, reaching $93 billion.

In contrast, smaller banks, which have been more vulnerable since last year's regional banking crisis, are squeezed further under these conditions. These banks have had to increase deposit rates to attract and retain customers, which cuts into their profitability. The situation is exacerbated for banks like Valley Bank, which anticipated a more lenient rate cut schedule that did not materialize, leading to increased financial strain due to a higher-than-expected cost of deposits.

Commercial real estate loans pose an additional risk, especially for smaller banks with greater exposure to this sector. With a record $929 billion in such loans maturing this year, and many surpassing the underlying property values, the potential for financial instability is significant. This sector's vulnerability could lead to more pronounced issues during the earnings announcements, as banks grapple with potential loan losses and tighter margins.

Overall, this earnings season is expected to underscore the challenges faced by smaller banks in a high-rate environment, while larger banks capitalize on their structural and operational advantages.

🔍 SOURCE: https://www.cnbc.com/2024/04/11/bank-earnings-high-interest-rates-set-to-pressure-small-players.html