High interest rate settings that put pressure on small businesses

The benefits of scale will never be more apparent than on Friday, when banks begin reporting their quarterly results.

Since the turmoil of last year’s local banking crisis that involved three financial institutions, big banks have mostly fared better than smaller banks. This trend is likely to continue, especially since expectations for the size of the Fed’s interest rate cuts have plummeted since the beginning of the year.

Analysts say the evolving interest rate landscape, known as a “prolonged rise in interest rates,” will boost profits for big banks while many This will put pressure on smaller banks and increase concerns for the group and investors.

JP Morgan ChaseThe nation’s largest lender released industry earnings on Friday, followed by american bank and goldman sachs next week. on monday, M&T Bank was one of the first regional financial institutions to report during this period and is publishing its results.

The focus of all of them is how changing views on interest rates will affect funding costs and holdings of commercial real estate loans.

“There are a handful of banks that have done a very good job of managing interest rate cycles, but there are also many that have mismanaged them,” said Christopher McGratty, head of U.S. banking research at KBW.

for example, valley bank, a regional lender based in Wayne, New Jersey. The bank’s guidance in January included expectations for seven rate cuts this year, which would allow it to pay lower rates to depositors.

In fact, banks may be forced to revise their net interest income forecasts downward as the cuts do not materialize, the paper said. morgan stanley Analyst Manan Gosalia gives the company a sell rating.

Net interest income is the money generated by a bank’s loans and securities minus the amount the bank pays on deposits.

In the wake of last year’s Silicon Valley bank failure, small banks are being forced to pay out larger deposits than large, supposedly safe banks. The rate cut would have provided some relief to small banks, while also helping commercial real estate borrowers and their lenders.

Gosalia wrote in an April 4 memo that Valley Bank faces “more deposit pricing pressure than its peer banks if interest rates remain high for an extended period of time,” and that it has more commercial real estate assets than other regional banks. He said he was exposed.

For big banks like JPMorgan, on the other hand, higher interest rates generally mean they can leverage their funding advantages for longer. They benefit from generally lower interest rates on deposits, but higher interest on things like credit card loans and investments made when interest rates are rising.

JPMorgan has raised its 2024 net interest income forecast by an estimated $2 billion to $3 billion, potentially to $93 billion, according to UBS analyst Erika Najarian.

Large U.S. banks also tend to have more diversified revenue streams than smaller banks, in areas such as wealth management and investment banking. Market strength and a pick-up in Wall Street activity should both boost first-quarter results.

Additionally, large banks tend to have much lower exposure to commercial real estate than smaller banks and generally have higher levels of loan loss reserves, thanks to stricter group regulation.

This difference could prove decisive this earnings season.

Concerns about commercial real estate, especially office buildings and apartment complexes, have plagued small banks ever since. new york community bank surprised investors in January by revealing significantly expanded loan reserves and widespread operational challenges. Last month, the bank needed a lifeline of more than $1 billion to stabilize the company’s operations.

JPMorgan analyst Stephen Alexopoulos said NYCB will likely have to revise its net interest income forecast downward due to shrinking deposits and margin requirements.

A record $929 billion in commercial real estate loans are coming due this year, with about one-third of the loans for amounts exceeding the value of the underlying property, according to advisory firm Newmark. .

“I don’t think we’re out of the woods in terms of commercial real estate targeting bank profits, especially if interest rates stay high for an extended period of time,” said Matt Stuckey, chief portfolio manager of equities at Northwestern Mutual. Stated.

“If there’s even the slightest whiff of trouble in the credit experience of a commercial lending business, you’ve seen how quickly it can get away with it, as was the case with NYCB,” he said.