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- Several of Wall Street’s biggest banks reported second-quarter results this week that rattled investors and got them worried about the impact of lower interest rates.
- In the weeks leading up to bank earnings, investors and analysts were worried about net interest margins, one of the most important metrics for a banks profitability.
- Both Wells Fargo and Citigroup reported declining net interest margins, and Goldman Sachs lowered its yearly outlook for net interest income.
- The Fed is expected to adjust borrowing costs in July, and as rates move lower, banks earn less money on their overnight deposits to other institutions.
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The Federal Reserve‘s expected rate cut in July is already rippling through Wall Street.
All of the major US banks reported second quarter earnings this week, with several posting declines in net interest margins due to interest rates that have already fallen in anticipation for the Fed’s action. Lower rates are bad for banks because they earn less interest income on overnight deposits to other lending institutions.
Investors are worried that net interest margins have already as the Fed prepares to start cutting rates in July. During a speech in late June, Fed chair Jerome Powell told the Council on Foreign Relations its better to adjust borrowing costs earlier rather later if there are signs of weakness in the economy.
New York Fed President John Williams and Richard Clarida, the vice chair of the Fed, echoed similar sentiments this past week, adding that it’s important to for central banks to act quickly and be proactive with rate cuts.
Major banks across Wall Street are already feeling the squeeze, and that could continue if the Fed cuts again.
The following banks reported either a drop in net interest margins or lowered their guidance for the year:
- Citi: Net interest margins fell 2.67% from 2.70% a year ago
- JPMorgan: Lowered net interest income outlook to $57.5 billion from more than $58 billion it predicted in the first quarter
- Wells Fargo: Net interest margins dropped to 2.82% from 2.93% last year
While Citi’s net interest margins slipped, net interest income still increased by 2% thanks to a boost from its lending business. Morgan Stanley doesn’t report net interest margins, but Jonathan Pruzen, the bank’s chief financial officer, said lower interest rates would hurt margins in wealth management, but the impact on equities and fixed income was hard to predict.
“The bigger question heading into earnings season was whether NIM outlooks would trigger material downwards revisions in EPS estimates,” Saul Martinez, an analyst at UBS said in a research note on Wednesday. “Thus far, they haven’t led us to change EPS estimates much.”
Wall Street also broadly saw a decline in equities and fixed income trading. Morgan Stanley said its equities trading revenue fell by 14%, or more than any other major bank.
Goldman Sachs, which isn’t impacted as much by rate changes because it has fewer deposits on its books, posted an increase fixed income trading, but a drop in equities. The firm also posted investment and lending revenues of $2.53 billion, its highest level in eight years.
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