What to expect from bank earnings as high interest rates pressure smaller players

The
benefits
of
scale
will
never
be
more
obvious
than
when
banks
begin
reporting
quarterly
results
on
Friday.

Ever
since
the
chaos
of
last
year’s
regional

banking
crisis
that
consumed
three
institutions,
larger
banks
have
mostly
fared
better
than
smaller
ones.
That
trend
is
set
to
continue,
especially
as
expectations
for
the
magnitude
of
Federal
Reserve
interest
rates
cuts
have
fallen

sharply
since
the
start
of
the
year.

The
evolving
picture
on
interest
rates
—
dubbed “higher
for
longer”
as
expectations
for
rate
cuts
this
year
shift
from
six
reductions
to
perhaps
three
–
will
boost
revenue
for
big
banks
while
squeezing
many
smaller
ones,
adding
to
concerns
for
the
group,
according
to
analysts
and
investors.

JPMorgan
Chase,
the
nation’s
largest
lender,
kicks
off
earnings
for
the
industry
on
Friday,
followed
by


Bank
of
America
and


Goldman
Sachs
next
week.
On
Monday,


M&T
Bank
posts
results,
one
of
the
first
regional
lenders
to
report
this
period.

The
focus
for
all
of
them
will
be
how
the
shifting
view
on
interest
rates
will
impact
funding
costs
and
holdings
of
commercial
real
estate
loans.

“There’s
a
handful
of
banks
that
have
done
a
very
good
job
managing
the
rate
cycle,
and
there’s
been
a
lot
of
banks
that
have
mismanaged
it,”
said

Christopher
McGratty,
head
of
U.S.
bank
research
at
KBW.

Take,
for
instance,


Valley
Bank,
a
regional
lender
based
in
Wayne,
New
Jersey.
Guidance
the
bank
gave
in
January
included
expectations
for
seven
rate
cuts
this
year,
which
would’ve
allowed
it
to
pay
lower
rates
to
depositors.

Instead,
the
bank
might
be
forced
to
slash
its
outlook
for
net
interest
income
as
cuts
don’t
materialize,
according
to


Morgan
Stanley
analyst
Manan
Gosalia,
who
has
the
equivalent
of
a
sell
rating
on
the
firm.

Net
interest
income
is
the
money
generated
by
a
bank’s
loans
and
securities,
minus
what
it
pays
for
deposits.

Smaller
banks
have
been
forced
to
pay
up
for
deposits
more
so
than
larger
ones,
which
are
perceived
to
be
safer,
in
the
aftermath
of
the

Silicon
Valley
Bank
failure
last
year.
Rate
cuts
would’ve
provided
some
relief
for
smaller
banks,
while
also
helping
commercial
real
estate
borrowers
and
their
lenders.

Valley
Bank
faces “more
deposit
pricing
pressure
than
peers
if
rates
stay
higher
for
longer”
and
has
more
commercial
real
estate
exposure
than
other
regionals,
Gosalia
said
in
an
April
4
note.

Meanwhile,
for
large
banks
like
JPMorgan,
higher
rates
generally
mean
they
can
exploit
their
funding
advantages
for
longer.
They
enjoy
the
benefits
of
reaping
higher
interest
for
things
like
credit
card
loans
and
investments
made
during
a
time
of
elevated
rates,
while
generally
paying
low
rates
for
deposits.

JPMorgan
could
raise
its
2024
guidance
for
net
interest
income
by
an
estimated
$2
billion
to
$3
billion,
to
$93
billion,
according
to
UBS
analyst
Erika
Najarian.

Large
U.S.
banks
also
tend
to
have
more
diverse
revenue
streams
than
smaller
ones
from
areas
like
wealth
management
and
investment
banking.
Both
should
provide
boosts
to
first-quarter
results,
thanks
to
buoyant
markets
and
a
rebound
in
Wall
Street
activity.

Furthermore,
big
banks
tend
to
have
much
lower
exposure
to
commercial
real
estate
compared
with
smaller
players,
and
have
generally
higher
levels
of
provisions
for
loan
losses,
thanks
to
tougher
regulations
on
the
group.

That
difference
could
prove
critical
this
earnings
season.

Concerns
over
commercial
real
estate,
especially
office
buildings
and
multifamily
dwellings,
have
dogged
smaller
banks
since


New
York
Community
Bank
stunned
investors
in
January
with
its
disclosures
of
drastically
larger
loan
provisions
and
broader
operational
challenges.
The
bank
needed
a
$1
billion-plus
lifeline
last
month
to
help
steady
the
firm.

NYCB
will
likely
have
to
cut
its
net
interest
income
guidance
because
of

shrinking
deposits
and
margins,
according
to
JPMorgan
analyst
Steven
Alexopoulos.

There
is
a
record
$929
billion
in
commercial
real
estate
loans
coming
due
this
year,
and
roughly
one-third
of
the
loans
are
for
more
money
than
the
underlying
property
values,
according
to
advisory
firm
Newmark.

“I
don’t
think
we’re
out
of
the
woods
in
terms
of
commercial
real
estate
rearing
its
ugly
head
for
bank
earnings,
especially
if
rates
stay
higher
for
longer,”
said
Matt
Stucky,
chief
portfolio
manager
for
equities
at
Northwestern
Mutual.

“If
there’s
even
a
whiff
of
problems
around
the
credit
experience
with
your
commercial
lending
operation,
as
was
the
case
with
NYCB,
you’ve
seen
how
quickly
that
can
get
away
from
you,”
he
said.