U.S. banks aren’t fooling themselves — they’re likely in for a long stretch of low interest rates putting a burden on their profits, the Financial Times (FT) reports.
Most of the biggest banks, including JPMorgan Chase, Wells Fargo, Citigroup and Bank of America, said at a recent industry conference that they were trimming their revenue expectations for the year. JPMorgan Chase cut its forecast by $1 billion, now expecting $55 billion as compared to $57 billion last year, FT wrote.
According to recent projections by the U.S. Federal Reserve, rates will likely remain at their current low numbers until around 2023. The Fed said it wouldn’t be tightening policy until it began to see inflation rising for longer periods of time.
That means banks’ profit margins will suffer more as low interest rates dampen yields at a time when the cost of deposit funding is already extremely low.
These negative expectations are likely to keep going through the new year, FT writes, with estimates for large bank earnings expected to be around where they are now or lower, according to analysts.
Some investors have been left bewildered by the increasing discount. Eric Hagemann of Pzena Investment Management said that the low interest rates should help the stock valuations through lowering the discount rate for future profits.
“Banks are underperforming because of low rates, but low rates should increase the multiple of all equities,” he said, according to FT. “Earnings-per-share estimates coming down makes sense — but multiple contraction, too? It seems like double punishment.”
Jamie Dimon, J.P. Morgan Chase CEO, was on record earlier this month saying that he thought the bank could improve its reserves if the economy recovers, PYMNTS writes. Dimon, speaking with analysts from Keefe, Bruyette & Woods (KBW), said the bank was seeing credit do well and customers continuing to make payments. That said, he acknowledged the uncertainty surrounding the economic crisis and said losses were still difficult to gauge.