Analysts said they will be listening closely to what executives say during earnings conference calls. J.P. Morgan CEO Jamie Dimon reports earnings first on Friday. “If Jamie and (CFO) Marianne Lake come out tomorrow and say, We’re cutting our loan-growth expectations because trade wars are starting to weigh on CEO confidence, and, by the way, M&A is falling off a cliff too, that would spook investors,” said Brian Foran, an analyst at Autonomous Research.
The KBW Bank Index, which tracks many regional lenders, is down 3.5 percent for the year and more than 6 percent in the last month. Analysts will be looking to hear what banks say about loan growth, deposit costs and net interest margins, Foran said.
The Federal Reserve has raised its benchmark interest rate three times this year and is expected to hike once more in December as it moves rates back to more normal levels after a decade of historic lows.
This is a double-edged sword for banks because while they can make more money from lending when rates move up, higher rates also mean banks have to pay more on deposits, and they tend to put a damper on loan demand.
This all weighs on the bank sector, according to Jeffrey Gundlach of ValueLine.
“If the rate is higher there’s no surprise that we see declines in home builder confidence and also the University of Michigan survey that says is this a good time to buy a house,” Gundlach said on CNBC on Thursday. “Banks are doing terribly because the loan volume is likely to shrink as we see interest rates going higher, because it’s difficult for people to afford higher rates.”
An additional tricky factor is that shorter-term rates are moving closer to longer-term rates, narrowing banks’ profit margin off lending. This is particularly a problem for smaller regional banks that depend more on lending and less on fee-generating activities such as asset management and corporate advisory.
“There’s more competition around deposits and the realization that rising rates aren’t going to be good for banks forever,” Foran said. “Eventually, it will become neutral and then a negative.”
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