Bank Earnings Expected to Fall Despite Rate Boost

Bank profits are expected to fall by 8% in 2022, with financial challenges mitigating the effects of higher interest rates, according to S&P Global Market Intelligence.

Earnings were boosted in 2021 by the release of reserves, nearly doubling year-over-year, S&P Lead Banking Analyst Nathan Stovall told Yahoo Finance. Credit-loss allowances were provided during the COVID-19 pandemic, and when the recovery began and losses weren’t as great as expected, banks benefitted from their release.

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JPMorgan’s revenue increased by more than $2 billion in the third quarter of 2021, for instance, with profit jumping to nearly $11.7 billion for the quarter. Without the reserves, earnings would have been largely unchanged from the previous year.

Higher interest rates in 2022 will increase banks’ net interest income and margins, but perhaps not enough to equal last year’s boost from reserve releases, which is set to fade, according to S&P Global’s U.S. Bank Market Report. Also, the swelling of consumer deposits during the pandemic, which led to excess liquidity that pressured bank revenues, may not disappear, especially for consumer banks. S&P Global expects excess liquidity to remain above $3 trillion, despite a rebound in loans, which may give some banks the opportunity to improve margins.

“Even if you had just unprecedented loan growth over the next few years, you wouldn't return to a pre-pandemic level, in terms of the loan-to-deposit ratio,” Stovall told Yahoo Finance.

As the Federal Reserve scales back its $9 trillion balance sheet and hikes interest rates, banks can expect margins to increase by 21 basis points in 2022 to roughly 2.7%. The Fed announced at its March meeting that it will soon begin to reduce its securities holdings in a predictable schedule over time, perhaps instituting monthly caps of about $60 billion on Treasury securities and $35 billion for mortgage-backed securities, according to minutes taken at the meeting.