Higher interest rates supported the big banks net interest income (NII) in the second quarter, which is the profit banks make by charging higher interest rates to borrowers than they pay out to depositors and account holders.
Key things
- Net interest income is the profit that banks earn by charging higher interest rates to borrowers than they pay out to depositors and account holders.
- Big banks reported strong growth in net interest income in the second quarter, driven by higher interest rates as a result of the Fed’s tightening monetary policy.
- JPMorgan Chase, Bank of America and Bank of New York Mellon were among the banks posting the strongest gains.
JPMorgan Chase (JPM) posted one of the biggest gains when it released its profit for the second quarter on Tuesday. Net interest income at America’s biggest bank rose 44% to $21.9 billion, or 38% excl. purchase of the First Republic Bank in May.
Gains were also impressive at Bank of America (BAC), the second largest bank in the country by assets. Net interest income increased 14% to $14.2 billion, helping the growth 11% increase in sales and 21% annual profit earnings per share (EPS).
In Bank of New York Mellon (BK), net interest income rose 33%, leading to a 5% increase in total revenue to $4.5 billion.
Not all banks benefited from higher interest rates. State Street (STT), one of the largest in the country depository banks, the NII said fell 10% from the previous quarter as deposits fell. However, it was still up 18% year-on-year, reflecting the sustained rise in interest rates over the past year. The bank warned on the earnings call that the net interest rate could gradually fall by another 12% to 18% due to falling deposit levels.
The Federal Reserve SystemRate hikes since March last year pushed interest rates to their highest level in more than 15 years and raised borrowing costs for everything from mortgages to credit cards and car loans. Fed officials probably will increase in interest rates on the 11 and maybe the last time of this cycle next week FOMC meeting, raising the benchmark federal funds rate another 25 basis points (bps) in the range of 5.25% to 5.5%, which is the highest in the last 22 years.
Banks tend to benefit from rising interest rates like theirs net interest marginthe difference between interest income and costs, improve. When rates rise, banks are able to charge higher interest rates on newly issued loans than they pay out to depositors.
However, there is a caveat. If interest rates rise too much or too quickly, it could discourage potential borrowers from seeking loans, leading to an economic slowdown and hitting the lending side of the bank’s business.