Will low interest rates keep crimping bank profits?

Annie Baxter Oct 12, 2015
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Will low interest rates keep crimping bank profits?

Annie Baxter Oct 12, 2015
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The nation’s largest banks report quarterly earnings this week, with J.P. Morgan Chase kicking off earnings season Tuesday.

The Federal Reserve has signaled it will keep interest rates low for several months, which is proving challenging for banks.

Low rates do benefit banks in some ways: They help banks borrow money cheaply. But savers lament the paltry interest rates they earn on deposits these days.

Low rates can also boost lending, by making mortgages more attractive. 

Shannon Stemm, an analyst at Edward Jones, said the way those two things play together is important.

“To the extent that banks borrow money at shorter-term rates, and they tend to lend out the money at longer-term rates, like a mortgage, for example, they make money by earning the difference between those two,” she said.

The hitch? Banking consultant Bert Ely said lending rates have dropped more than the rates banks pay for deposits, which can’t really go any lower.

“What the effect has been over recent years is to squeeze down the differential between what they collect and what they pay out in interest,” he said. “And that in effect has reduced the banks’ revenue.”

Stemm said banks probably don’t have many options left to cut costs and improve profits, having already gone through rounds of layoffs. Even still, U.S. Bancorp, one of the leanest operators, has said more cost-cutting could be in the offing if rates stay low. 

Banks’ exposure to the oil industry, which has been walloped by low prices, could also be notable in the upcoming season. Ely said banks may have to set aside money to cover loan losses tied to that sector.

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