Slowing lending growth risks reducing a key generator of profitability for the main US banks when they report third-quarter earnings this week.

Net interest income — the difference between what banks spend on deposits and what they make from loans and other assets — has boosted earnings for companies such as JPMorgan Chase, Bank of America, and Citigroup in the last 18 months.

The major US banks have benefited from charging higher interest rates for loans in tandem with the Federal Reserve boosting benchmark rates without considerably raising interest rates for savers.

And, while weekly Fed figures show that consumer credit card borrowing is still expanding, albeit at a reduced rate, business borrowing has dropped in the last six months. Analysts blame rising interest rates.

“Loan growth has slowed dramatically,” Morgan Stanley banking analyst Betsy Graseck wrote last week in a client report. “Our view is weak loan growth reduces NII growth into 2024.”

According to Morgan Stanley analysts, the 25 largest US banks by assets have seen loan growth drop significantly since the beginning of the year, to around 1.5% from 8% a year ago.

Banks have also grown more selective in the loans they issue in anticipation of proposed new US rules for large banks, known as the Basel III Endgame, which would increase the amount of loss-absorbing capital they would be required to maintain against their assets.

According to the Financial Times, JPMorgan has accelerated the securitization of billions of dollars of its loan portfolio in anticipation of the new laws.

“Expect a lot of discussion on the earnings calls around the Basel III Endgame in terms of what the expected impact is with the current proposal, and then what actions banks plan to undertake to mitigate the likely increase in risk-weighted assets,” said Jason Goldberg, a bank analyst at Barclays.

JPMorgan, Citi, and Wells Fargo are the first of the four largest US banks by assets to announce results for the three months ending September 30, with profits expected on October 13. On October 17, the Bank of America will release its findings.

Goldman Sachs and Morgan Stanley announce earnings on October 17 and 18, respectively, with a focus on investment banking, trading, and asset management.

According to Bloomberg consensus estimates, JPMorgan and Wells Fargo will be the only banks whose profits increased in the third quarter compared to the previous year.

Pressure to provide clients greater savings rates to maintain their deposits, which are banks’ principal source of funding, is adding to the compression on bank profitability.

Big banks like JPMorgan and Bank of America acquired record levels of deposits during the epidemic, but these numbers have been declining in the last 18 months as the Fed has raised interest rates. The big banks raised loan rates but did not raise saving rates, resulting in low so-called deposit betas.

The Investment Company Institute reported on Thursday that money market funds, which can now yield up to 5% for investors, took in $64.1 billion for the week ending October 4, increasing the industry total to $5.7 trillion.

With the consensus now hardening that the Fed will maintain interest rates higher for longer, analysts expect banks will raise rates to entice savers to preserve their accounts.


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