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The crunch from an inverting yield curve is hurting top-line growth at the big banks, forcing the nation’s largest lenders to turn to capital distributions to deliver estimates-beating earnings per share.
Gloomier expectations in the short run have pushed some of the large banks to temper their forecasts for 2019 in their earnings calls. A big reason: banks are facing higher costs of customer deposits even though the Federal Reserve has signaled no more rate hikes for 2019. Having to pay more on deposits hurts banks’ net interest income, a measurement of revenue made on loans subtracted by interest paid on deposits.
JPMorgan Chase (JPM) CFO Marianne Lake said April 12 there’s a “risk associated with the flat yield curve,” and noted that the company’s $58 billion in projected net interest income for next quarter is no longer “conservative” but “straight down the middle.”
Bank of America (BAC) CFO Paul Donofrio signaled April 16 that their net interest income would only grow by about 3% for the full-year 2019. That figure is roughly half of the net interest income growth Bank of America saw in 2018, at about 6%.
And at Wells Fargo (WFC), executives said April 12 they expect net interest income to decline 2% to 5% this year compared with 2018. The company had previously projected between a 2% decline and a 2% rise in net interest income for the year.
The large banks are already seeing some signs of wear on revenue. Marty Mosby, who analyzes the big banks for Vining Sparks, told Yahoo Finance that an inverting yield curve is creating some pressure that will lead to slower revenue growth.
But Mosby said high returns of capital will allow the big banks to skate by fine even if net income grows only 4% to 5%.
“It’s a different mix,” Mosby said. “We are in a transition from where we saw stronger revenue growth with interest rates going higher to slower revenue growth. But there’s kind of a hand-off to the capital side being able to keep the overall growth high.”
Inversion coming?
The big banks have done just that. The four largest U.S. banks — JPMorgan Chase, Bank of America, Citigroup (C), and Wells Fargo — bought back a total of $19 billion in stock for the first quarter of 2019.
Through share buybacks and cost cutting, the big four banks were still able to beat earnings estimates on the bottom line.
Keefe, Bruyette & Woods analysts wrote in a note April 18 that while banks are promising estimate-beating EPS, investors face a “conundrum” over the uncertainty of slower growth in the near term.
“[I]n this late cycle economy the best bet would appear to be banks that aren’t promising much growth, but have limited risk of missing earnings,” the KBW note read.