Big U.S. banks are expected to see a feeble start to the earnings season this week. And it’s primarily because of the Fed trimming interest rates three times last year after nine hikes in the previous three-year period. Drop in business investments, consistently low inflation and trade-related issues were cited as the reasons behind the rate cuts. At the same time, President Trump wanted the Fed to slash rates more aggressively, thanks to record-low unemployment levels.
Decline in interest rates nonetheless adversely impact net interest margins. Needless to say, a bank’s profit margin depends on its net interest income or the difference between the rates they charge as long-term loans and the rate they pay for short-term borrowings.
For fourth-quarter earnings, the Major Banks industry, including JPMorgan (NYSE:) and Wells Fargo (NYSE:), is expected to see an earnings decline of 9.6% from the same period last year despite 1.4% higher revenues (read more: Can Earnings Reports Push Bank Stocks Even Higher?).
But not everything has been gloomy for banks in the fourth quarter. After all, declining interest rates sometimes tend to do well for banks, fueling demand for loans. And if we look into the non-interest income side, revenues should increase as banks continue to expand wealth management and consumer lending businesses.
Housing and car loans have increased considerably, thanks to lower interest rates. Lenders made $700 billion in mortgages in the third quarter, fueled by customers’ rush to refinance. And such a hot streak is expected to have remained intact in the fourth quarter, especially due to low mortgage rates. Per Freddie Mac, the average rate for a 30-year fixed mortgage dropped to 3.64% last week, its lowest level 13 weeks. By the way, the Fed recently said that large banks’ loans to consumers have increased 11.9% in the