Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

U.S. banks hit by low interest rates, weak trading

(Reuters) – U.S. banks are cutting costs to boost earnings as interest rates remain stuck near historic lows and fixed-income trading, long a source of revenue growth, shows no sign of picking up.

Of the three big U.S. banks that have reported quarterly results so far, only Wells Fargo & Co, the biggest mortgage lender, managed a rise in revenue and income from interests on loans – and that thanks mostly to its strategy of leveraging its hefty balance sheet to buy loans.

JPMorgan Chase & Co and Bank of America Inc reported a fall on both measures as low interest rates squeeze the spread between banks’ cost of funds and the interest earned from loans and securities.

Normally, turbulence would be good for trading. But unusually high volatility during the third quarter, exacerbated by uncertainty about the timing of the first U.S. interest rate hike since 2006, discouraged investors from making big bets.

The U.S. Federal Reserve held off on a rise that many had expected in mid-September, citing worries about global growth, jittery markets and muted inflation.

“The longer the Fed holds off, the more pressure on the revenue,” Edward Jones analyst Shannon Stemm told Reuters.

The first few weeks of the new quarter offered little sign of a pickup in trading, prompting JPMorgan Chief Financial Officer Marianne Lake to say that analyst estimates for the current quarter appeared to be too high.

Bank of America, the No. 2 U.S. bank by assets, reported on Wednesday that three of its four main businesses reported a drop in revenue. Only consumer banking managed a rise – of 1 percent.

JPMorgan, the biggest U.S. bank, reported on Tuesday a 6.4 percent drop in revenue with only its consumer banking business of its four main profit centers showing a rise in profit.

The bank posted a 22 percent rise in net income, but this was mainly due to a tax benefit and lower costs related to employee pay.

Cost cuts paid off especially for BofA. The Charlotte, North Carolina-based bank reported a profit, compared with a year-earlier loss, thanks largely to a 31 percent drop on non-interest expenses.

Under CEO Brian Moynihan, BofA – which paid more than $70 billion in legal settlements since 2008 – has been slashing billions of dollars in costs in its commercial lending, investment banking and wealth management businesses as it seeks to put the worst of the financial crisis behind it.

The problems for banks don’t end with the U.S. banks.

Germany’s Deutsche Bank reported a record pre-tax loss of $6.9 billion in the quarter and warned investors of a possible dividend cut.

With rates staying low, “it’s a steadily decaying profit picture,” said Phil Davis, chief executive of trading advisory website

Citigroup Inc and Goldman Sachs Group Inc report results on Thursday and Morgan Stanley on Monday.

Investors will be keen to find out how their investment banking businesses performed during the tumultuous quarter.

Only 26 companies went public in the United States in the third quarter, down from 59 in the same period last year, according to Thomson Reuters data. Others have delayed IPOs.

Neiman Marcus Group Inc, the U.S. luxury specialty department store chain, is holding off on an initial public offering until 2016, sources told Reuters on Tuesday. (Reporting by Richa Naidu and Sweta Singh in Bengaluru; Additional reporting by Rachel Chitra in Bengaluru; Editing by Ted Kerr)

Tagged with →