The largest U.S. banks appear unfazed by the Federal Reserve’s rate hikes and balance sheet normalization, as JPMorgan Chase, Citigroup and Wells Fargo all posted higher earnings on interest on Friday.
But all three banks were able to grow their net interest margins, a key measure of the difference between interest collected from loans and interest paid on deposits.
JPMorgan Chase squeezed the largest boost in net interest margin, widening its spread by 14 basis points year-over-year and 5 basis points quarter-over-quarter. The company was able to improve its earnings in part because it expanded core loan growth by 6% year-over-year. Those loans represent a larger pool of interest-bearing assets that bring the company more revenue.
JPMorgan Chase CFO Marianne Lake said the company has adapted quickly to rate changes, calmly saying that deposits are “largely behaving as we would have expected.”
Citigroup also grew its loan portfolio to fuel a higher net interest margin. Wells Fargo, which saw its total loan levels decrease, said it cut lower-yielding assets out of its portfolio to improve the efficiency of its interest-bearing assets.
Higher interest rates have a push and pull effect on bank revenues; although higher interest rates theoretically bump the interest that banks can collect on loans, they also raise the cost of interest-bearing deposits that customers park at a bank.
‘The Fed tightening … continues to help banks’
But observers have also expressed concern that the Fed’s balance sheet unwind would reduce deposit growth by taking cash out of the economy and dissuading people from leaving more money at their banks.
Marty Mosby, an analyst with Vining Sparks who watches the large banks, said the third-quarter earnings reported Friday show that asset yields are rising faster than the costs of deposits.
“The Fed tightening, as they are, continues to help banks,” Mosby said, noting that he has still noticed deposit costs nudging up, but not to alarming levels.
The health of the large banks stands in stark contrast to the fear that rising rates would cripple lending activity in the U.S. President Donald Trump has spent the last few days bashing Fed Chair Jerome Powell, saying that the independent central bank has “gone crazy” by raising rates.
“I would rather pay down debt or do other things,” Trump said after the Fed’s most recent rate hike.
But JPMorgan Chase CEO Jamie Dimon said the banking industry is not out of the weeds yet, noting that the Fed’s balance sheet normalization process is far from over.
“That’s $1 trillion out of deposits,” Dimon said of the Fed’s reversal of its quantitative easing. “That will have an effect, [on] macro competition and stuff like that.”
Brian Cheung is an on-air reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. Follow him on Twitter @bcheungz.