NEW YORK–The ongoing high-rate environment has strained the bottom line of some of the nation’s banks as deposit costs have risen and credit card and commercial real estate portfolios have been affected, but in the end those higher rates could work in banks’ favor, according to one new analysis.
“Rate cuts could stimulate more borrowing and encourage Wall Street dealmaking, while also helping banks dial back the rates they are paying on things like high-yield savings accounts or certificates of deposit,” stated a Wall Street Journal report. “If the Fed ultimately only cuts rates a few times and doesn’t return to the ultralow rates of previous cycles, that would help keep banks’ overall interest earnings pretty robust.
Could Get ‘Rocky’
But the transition to that world could get rocky. “The first small decline in rates probably won’t by itself stimulate a huge amount of new lending,” the analysis continued. “Yet it will start to eat into banks’ interest earnings on their cash, and on floating-rate loans tied to benchmark rates, like credit cards or corporate revolvers. And a lot of depositors are probably still going to be looking for a good return on their cash.”
The Journal noted that when Wells Fargo recently reported second-quarter earnings it said it currently expects net interest income this year to be down by around 8% to 9%, “a bit more pessimistic than its prior range of a roughly 7% to 9% decline.”
May Pass on Escape Route
The Wall Street Journal report went on to note that banks can escape this squeeze and add more dollars overall to their earnings if they are growing their loan books, but big corporate borrowers are still acting cautiously, and some may even be looking to shrink their commercial loan books.