Will lower rates eat into US bank profitability?

This week, US earnings season gets under way again with the highlights expected to be the latest trading updates from some of the US’s biggest banks.

This week, US earnings season gets under way again with the highlights expected to be the latest trading updates from some of the US’s biggest banks. These can give a useful insight into the overall health of the US consumer and as such the US economy, as JP Morgan, Bank of America and Wells Fargo all report their latest trading updates for Q1.

At the beginning of the year US investment bank JP Morgan reported a 10% rise in profits driven by cuts in expenses and a rise in revenues. Retail revenues were a particularly strong point particularly in the retail sector domestically, with increases in total loans, while the bank also gains in credit card, automotive and small business.     

It was a similar story for Bank of America Merrill Lynch in January as it also reported a 9.4% rise in profits. Like JP Morgan the bank is cutting back on unnecessary expenses as a combination of low interest rates and volatile markets continue to eat into its margins, while concerns about bad loans in the energy sector contrive to make investors nervous.

Wells Fargo, which is one of the biggest bellwethers of the US housing market given its position as one of the largest providers of US mortgages, found things a little trickier after posting a small drop in profits at the end of last year. A large part of that was due to larger provisions for bad loans to the oil and gas sector.

Since then we’ve seen an enormous amount of volatility in global markets as oil prices made fresh multi year lows and global interest rates have declined further.

This ongoing flattening of the yield curve as well as further stresses in the energy sector along with a weaker US economy could well signal a negative surprise when the following US banks report later this week, in a quarter where historically banks tend to generate the highest volumes in terms of trading activity over the 12 month period.

Over the past two years the best performing quarter in terms of bank trading revenues has been Q1, so this week’s trading updates are likely to set the tone for the rest of the year, and a poor set of numbers could well see a return to concerns about how banks in general are able to generate returns in an environment that is seeing an increasing number of interest rate products fall into negative territory.

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