interest rates

  • 23 Oct 2012 at 5:29 PM

Low Rates Squeeze Bank Profits To Record Highs

I fell a little down the rabbit hole of this Journal article on “Low Rates Pummel Banks.” This has long been a mystery to me as there are two diametrically opposite narratives of banks and low rates in the world. In one, banks borrow for free from the Fed and reinvest at higher rates and print free money and spend it on parties where they beat up retirees. In the other, banks are, um, pummeled by low rates. Neither of those theories is absurd on its face, as you can tell from the Journal article:

Superlow U.S. interest rates are squeezing bank profits, complicating the industry’s nascent recovery from the financial crisis. … U.S. banks earned $114.39 billion last year, their best showing since 2006.1

Profits are squeezed, but to their best level since before the financial crisis, so.

The Journal’s thesis is basically that banks are getting screwed because net interest margin, specifically, is squeezed, as mortgage rates keep dropping, deposit rates are kind of floored and can’t drop any further, and other sources of revenue are drying up:

As higher-yielding loans and securities acquired before the crisis mature, the banks are forced to replace them with assets that carry much lower rates. With some sources of lucrative fee income such as debit card charges capped in 2010′s Dodd-Frank law, the margin squeeze has an outsize impact on the bottom line.

On the other hand, other other sources of revenue, like originating mortgages at record spreads to MBS rates, or just trading securities whose prices have been bolstered by declining rates, are still robust – but that business seems to be concentrated in big banks that also benefit from economies of scale. A Goldman equity research note yesterday came to the same place, noting that regional banks get ~58% of revenue from net interest while the big universal banks get only ~48% there:2 Read more »

Directed at no one in particular but if a certain jelly donut-addicted Fed Chair has found even his extra-forgiving sweatpants getting too snug, he might want to take note. Read more »

Got that?

1. Brian Moynihan told Bruce Berkowitz this afternoon, “I’m comfortable we can get to 1% return on assets based on a 1.25%-1.5% Fed funds rate and a normal business cycle.” Moving to 1.5%-area short term rates would apparently add about $3 billion to BofA’s net revenue.

2. Jamie Dimon chatted with Melissa Francis this morning and told her:
Read more »

Last week we learned that robbing a bank is as easy finding a Sharpie and drawing yourself a beard. Today we find out courtesy of JPMorgan that not only is it extremely easy to pull off but banks want you to take the money off their hands. Read more »

  • 04 Aug 2011 at 2:55 PM

BoNY Would Be Happier Without Your Dollar

So! Lots of signs of the apocalypse to choose from today. The Dow is down over almost 3%. The 10-year is yielding under 2.5%. Europe is sucking more countries into the vortex. Even gold is down somehow. Most ominously of all, Dealbreaker has been down all morning and afternoon, for reasons that are not clear to us but that we’re going to blame on interference from LightSquared anyway.

But our favorite harbinger of doom has to be the WSJ’s report that Bank of New York Mellon is now paying (0.13%) interest on large deposits – that is, if you want them to watch your money for you (and you’ve got over $50mm), you pay them 13bps. Negative rates on short-dated Treasuries are back, and negative real interest rates have been pretty common recently, but negative rates on large bank deposits are new to us. (Or not new exactly, since lots of people have fee checking accounts, but most of them don’t have $50 million in the bank.) Read more »

Jim Grant: My grown children have sort of a naughty phrase they say: beer goggles. Meaning the charitable perception that comes over one after a pop or two with respect to a member of the opposite sex.
Bloomberg’s Tom Keene: Really!
Jim Grant: Investors collectively, unknowingly have been wearing interest rate goggles. Read more »