7/18/2024

Ah, mid-July—barbecues, beach vacations, and, of course, big bank earnings. As the second-quarter results roll in, big banks are revealing a mixed bag, reflecting the ongoing impact of high interest rates and a cooling economy. Here’s what you need to know:

Net interest income is (still) under pressure. 

Despite benefiting in some ways from higher interest rates the past two years, banks continue to feel the squeeze as deposit costs rise. Net interest income fell for the second consecutive quarter at major banks—the result of increased competition for deposits and plateauing loan interest rates.

Investment banking is rebounding. 

One bright spot was a resurgence in investment banking, with revenue jumping significantly at many banks. This uptick is driven by a healthier pipeline of deals, boosted by favorable market conditions and renewed confidence among corporate executives.

Consumers are struggling with credit risks. 

Higher interest rates and inflation continue to impact consumers, particularly those in lower income brackets. Banks, noting increased delinquencies, are setting aside funds for potential bad loans and increasing credit loss provisions. The trend of rising credit card delinquencies and defaults highlights the growing financial strain on consumers.

Rising costs and regulatory challenges are impacting banks. 

Banks are grappling with higher operational costs, regulatory pressures, and potential revenue loss from regulatory caps on fees. The Federal Reserve’s stress tests indicated stable but riskier asset profiles, necessitating higher capital reserves, and creating additional pressure on banks.

Future outlook hinges on potential Fed rate cuts. 

Analysts predict that potential Fed rate cuts could offer some relief by allowing banks to reduce deposit interest faster than loan rates. However, the timing and magnitude of these cuts remain uncertain. Meanwhile, the broader economic outlook remains cautious, with banks preparing for continued volatility.

“There has been some progress bringing inflation down, but there are still multiple inflationary forces in front of us,” said JPMorgan CEO Jamie Dimon. And Chris Stanley, the banking industry practice lead at Moody’s, offered this: “Higher-for-longer interest rates, persistently high housing prices, softening used vehicle values, and signs of a cooling labor market merit focused scrutiny from the banking sector.”