U.S. Banks Boost Outlook For Net Interest Income Amid Fed Rate Rises

Big U.S. banks say net interest income, a key source of revenue, will continue to grow this year as interest rates rise, helping to buffer their bottom lines against declines in other key areas of the business.

Investors and analysts have been closely tracking banks' net interest income, or NII, money banks earn from loans and securities above their costs of funds. The income stream has been rising as the U.S. Federal Reserve has hiked interest rates to cool soaring inflation.

Analysts had been predicting the NII increases would be the biggest in years and they have generally come in above expectations.

On Monday, Bank of America Corp, viewed by analysts as the big bank likely to benefit most from rising interest rates, said NII jumped 21% in the second quarter compared with last year, and should grow by about $1 billion, or 7%, more in the third quarter. The pace is likely to further pick up in the fourth quarter, bank executives said on a call with analysts.

As the second-biggest U.S. bank, Bank of America tends to benefit more than competitors when interest rates rise, thanks to its large base of stable consumer deposits, many of which are interest-free.

Its guidance came after JPMorgan Chase & Co, Citigroup Inc, and Wells Fargo & Co last week reported year-on-year net interest income increases ranging from 14% to 26%.

"That's been the positive part about the quarter," said analyst David Konrad of Keefe, Bruyette & Woods.

Lending income is generally more important to banks than fees. For example, it provided 61% of Citigroup's total revenue in the quarter, according to analyst Dick Bove of Odeon Capital.

Citigroup said NII in its Treasury & Trade Solutions business, which handles operating cash and payments for corporations and makes trade loans, jumped 42% from a year-earlier. The bank said it expects NII to continue to increase this year, which will soften the blow from a slump in deals.

JPMorgan, the country's largest lender, said it now expects net interest income outside of its markets business to rise to $58 billion this year, compared with an estimate of $56 billion it made in May.

Wells Fargo, likewise, said it now expects 2022 net interest income will be up 20% from a year earlier compared with the mid-teens percentage point increase it had earlier projected. That would offset declines in mortgage lending.

RATES, DEPOSITS

It's unclear, however, how long NII can continue to grow.

While expected Fed rate rises are a key factor in NII outlooks for most banks, analysts also seek guidance from bank executives on the impact of other factors such as changes in loans, securities and deposits.

Currently, rates banks are able to earn on loans and securities are rising faster than the rates they are paying out on deposits, in large part because deposits surged during the pandemic thanks to government stimulus, reducing price competition.

But banks have said they expect rates they have to pay for deposits will increase more quickly as the Fed raises its rates and deposit levels start to normalize. Deposits at some banks are down and that could put a damper on net interest income in the future, Konrad said.

Loan growth, which has increased, is also key. Bank of America said its average loan balances in the quarter were up 12% from a year earlier, which also helped drive up NII, said Deutsche Bank analyst Matt O'Connor.

Last week, JPMorgan and Wells Fargo said their loan books had grown in the quarter, although executives said growth will likely slow in the second half.

There are also other factors that may dampen NII or stop it from boosting profits. JPMorgan, Bank of America and Citigroup, for example, are facing increases in regulatory capital requirements that could push them to reduce their assets or change the mix of loans and securities to holdings with lower interest yields.

Konrad said he believes the change in capital requirements could have a "modest" impact on near-term net interest income.

Losses on loans that go bad if Fed hikes bring on a recession could also overwhelm NII gains.