The big U.S. banks are reportedly facing a slowdown in lending growth due to rising interest rates, and it is expected to hurt their profits.
Net interest income, a key driver of earnings for banks, has been boosted by the Federal Reserve’s benchmark rate hikes over the last 18 months. However, a decline in corporate borrowing has led to a dramatic slowdown in loan growth, the Financial Times (FT) reported Monday (Oct. 9).
While credit card borrowing continues to grow, albeit at a slower pace, corporate borrowing has declined over the past six months, according to the report. Analysts attribute this slowdown to the impact of rising rates. Weak loan growth is expected to reduce net interest income growth for banks in the coming years.
In addition, in anticipation of proposed new U.S. requirements for large banks, known as the Basel III Endgame, banks have become more selective in approving loans, the report said. These regulations would increase the amount of loss-absorbing capital banks must hold against their assets.
The pressure to offer higher savings rates to retain deposits, coupled with the decline in deposit levels, has further squeezed bank profits, per the report. Banks are expected to increase rates for savers to retain deposits in light of the Federal Reserve’s intention to keep interest rates higher for longer.
As the big U.S. banks report their third-quarter results, the industry will closely watch their strategies to navigate the challenges posed by the current lending landscape, according to the report. JPMorgan, Citigroup and Wells Fargo will be the first of the largest U.S. banks to report third-quarter results, on Friday (Oct. 13), followed by Bank of America, Goldman Sachs and Morgan Stanley days later. Analysts predict that only JPMorgan and Wells Fargo will see their profits rise compared to the previous year.
PYMNTS Intelligence has found that 53% of small and medium-sized businesses (SMBs) have “no current access to credit” in the current environment. Roughly a third of SMBs have been using personal credit cards to keep things going, according to “Main Street Health Q2 2023: Credit’s Key Role in SMBs’ Plans,” a PYMNTS and Enigma collaboration.