Business

Fed rate hikes benefit banks — Unless they end up in a recession


Interest rates are rising, but bank stocks are not.

JPMorgan Chase

JPM -0.16%

& Co,

Goldman Sachs

GS -0.04%

Group Inc.,

Bank of America Corp.

BAC -0.24%

and

Morgan Stanley

MISS -0.84%

has dropped this year after two years of huge profits from the pandemic. All four banks are down more than 20% from a 52-week high, including a 28% drop at JPMorgan. Compared to a 14% drop for the S&P 500.

Higher interest rates were supposed to help bank stocks, but that hasn’t been the case this year. The Federal Reserve has has raised interest rates twice since March in an attempt to rein in inflation and hinted that more hikes are on the way.

But investors worry that raising interest rates too big or too quickly could push the economy into recession. Broader markets and major bank shares jumped on Wednesday after the Fed said it would raise interest rates by half a point. They fell sharply on Thursday and Friday as the realities of a tougher economic environment set in.

“People are worried that the Fed will push until something breaks, which could lead to a recession and credit losses,” said Citigroup analyst Keith Horowitz.

Higher rates may lead to billions of dollars in additional annual revenue for banks because they allow banks to charge more for loans while paying depositors more modestly. Banks can also earn more interest on previously inactive cash.

Morgan Stanley’s James Gorman said at the Wall Street Journal CEO’s Summit last week that bank stocks are largely undervalued relative to their potential.


Photo:

Simon Williams for The Wall Street Journal

Analysts at KBW, a unit of Stifel Financial Corp., expect net interest income to grow 18% at Bank of America and 17% at JPMorgan this year.

However, investors are analyzing different data on the financial health of consumers and businesses. US economy in recession rose 1.4% in the first quarter, the worst showing since the beginning of the pandemic, in the spring of 2020. Still, consumer and business spending remained strong. Bank executives pointed out high spending in categories like travel and entertainment as reasons for optimism.

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Market volatility due to higher interest rates and War in Ukraine has overwhelmed the deal-making businesses of big banks. Market for public output has been largely closed for the past few months.

Despite the sell-offs, bank executives are taking an upbeat tone. “Bank stocks have largely been undervalued… relative to their potential,” Morgan Stanley CEO James Gorman said last week/at the Journal CEO Board Summit. Wall Street Journal.

Although Mr. Gorman said a slight recession in the near future won’t surprise him, he added that economic uncertainty will not affect long-term decision-making. “If you have good strategic things to invest in, whether it’s a company, a portfolio manager, an investor, you should invest in them.”

Federal Reserve Chairman Jerome Powell said on Wednesday the central bank had approved a half-percentage point increase in interest rates in an effort to reduce inflation that is at a four-decade high. Photo: Win McNamee / Getty Images

Write letter for Charley Grant at [email protected]

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