How Interest Rate Changes Affect Financial Institutions

Impact on Net Interest Margins

Higher interest rates have led to decreased net interest income and margins for financial institutions like Citigroup and Wells Fargo, while Bank of America reported a net interest margin of only 1.93%. Conversely, Goldman Sachs saw an increase in net interest income due to higher yielding assets and non-interest bearing liabilities.

"In the first quarter, net interest income decreased by $317 million, largely driven by markets, which resulted in a 4 basis point decrease in net interest margin." --- (C, earning call, 2024/Q1)

"Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets." --- (WFC, earning call, 2024/Q1)

"But I think when you put it all together, what it's led to is a net interest margin of only 1.93%." --- (BAC, earning call, 2024/Q2)

"And this is one of the areas, of course investors are focused on in terms of the future of the net interest margin for you and your peers." --- (JPM, earning call, 2024/Q2)

"page nine, firmwide net interest income was $2.2 billion in the quarter, up sequentially from an increase in higher yielding assets and a shift towards non-interest bearing liabilities." --- (GS, earning call, 2024/Q2)

Effect on Loan Demand

Higher interest rates have led to weaker loan demand across major financial institutions, with clients being cautious and borrowing costs rising significantly. While some sectors like autos show solid demand, overall loan growth remains subdued due to the higher-rate environment.

"Weaker loan demand reflected the impact of clients being cautious given the higher-rate environment and the anticipation of lower rates this year as well as some potential uncertainty in an election year. Turning to" --- (WFC, earning call, 2024/Q1)

"So my financing rate will go down so that my price will go up. Eventually, there's a market and I think that's going to affect not just M and A, but it will affect the basic loan market where people say, I got to run my company, I need working capital, I'm going to borrow because I got to have inventory and we'll get back in the normal cycle." --- (PNC, conference, 2024/05/29)

"Turning to Slide 9, total average loans were $371 billion, down 0.5% linked-quarter as growth was impacted by slow industry loan demand in the current higher interest rate environment." --- (USB, earning call, 2024/Q1)

"And then secondly outside of Cards, loan demand has been quite weak. And any thoughts from you on if you're seeing any change in demand or how you're thinking about loan demand going forward? Thanks." --- (JPM, earning call, 2024/Q2)

"And the rest in autos are kind of in and out, but they're fine at $50 odd,000,000,000 So the loan demand is solid, but not robust because the borrowing costs went up a lot." --- (BAC, conference, 2024/05/30)

Changes in Investment Portfolios

Higher interest rates have led to reduced bank deposits and smaller investment securities portfolios at Charles Schwab, while State Street and Bank of New York Mellon increased their investment portfolios at higher yields. Northern Trust saw negative returns in fixed income due to rising yields, indicating cautious future outlooks.

"This decrease was primarily due to lower bank deposits as a result of changes in client cash allocations due to higher market interest rates and a smaller investment securities portfolio, partially offset by greater margin loan balances." --- (SCHW, sec filing, 2024/Q1)

"In addition, on a quarter-on-quarter basis, we proactively increased our investment portfolio balances at higher yields which benefited NII.Looking at the strong quarterly performance relative to our expectations in early June, we did see an inflow of valuable" --- (STT, earning call, 2024/Q2)

"Average interest-earning assets were up 2% quarter-over-quarter. Our average investment securities portfolio balances increased by 3%, and our cash and reverse repo balances increased by 1%." --- (BK, earning call, 2024/Q2)

""Gains from equities were partially offset in most institutional portfolios by allocations to fixed income, where rising yields led to negative returns and indicated caution about the future direction of interest rates." The Northern Trust U.S. Equity Program universe produced a 9.6% median return for the first quarter." --- (NTRS, press release, 2024/05/02)

"balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle, but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly." --- (SCHW, status update, 2024/07/16)

Regulatory Environment and Capital Adequacy

Financial institutions emphasize the critical importance of capital adequacy, adhering to comprehensive capital management policies and frameworks. They evaluate capital adequacy against regulatory capital ratio requirements, considering both Standardized and Advanced approaches, and adjust strategies based on market conditions and regulatory changes.

"Capital Management and Regulatory Capital Capital adequacy is of critical importance to us." --- (GS, sec filing, 2024/Q1)

"Additionally, over the four-quarter period beginning third quarter 2024 through second quarter 2025, the Company has capacity to repurchase common stock, which will be routinely assessed as part of the Company's internal capital adequacy framework that considers current market conditions, potential changes to regulatory capital requirements, and other risk factors." --- (WFC, press release, 2024/06/28)

"For each of these risk-based capital ratios, the capital adequacy of the Firm is evaluated against the lower of the Standardized or Advanced approaches compared to their respective regulatory capital ratio requirements." --- (JPM, sec filing, 2024/Q1)

"The lower of the capital ratios under Standardized or Advanced approaches compared to their respective regulatory capital ratio requirements is used to assess capital adequacy, including under the PCA framework." --- (BAC, sec filing, 2024/Q1)

"Capital adequacy is of critical importance to us. Accordingly, we have in place a comprehensive capital management policy that provides a framework, defines objectives and establishes guidelines to maintain an appropriate level and composition of capital in both business-as-usual and stressed conditions." --- (GS, sec filing, 2024/Q1)

Impact on Profitability

Higher interest rates impact financial institutions' profitability by increasing sensitivity to rate changes and influencing business health, as noted by Wells Fargo. Demand for private credit and secondary products at Goldman Sachs also reflects this trend.

"So therefore the impact of higher rates does have an impact on that. Our business does remain sensitive to interest rates and I would say just the overall health of the U. S.Economy." --- (WFC, event transcript, 2024/04/30)

"And so we're seeing enormous strength in private credit, but we also just raised a $14,000,000,000 secondaries fund just recently, and we're seeing good amount of demand and a strong amount of demand in the secondaries product." --- (GS, conference, 2024/05/30)

"70% of SBOs say they have made tradeoffs to maintain their business' profitability, such as increasing prices (47%), working more hours (45%) and reducing their own salary (32%)." --- (BAC, press release, 2024/05/01)

"But your question is on the investment bank specifically. And I feel really good about the way it's structured, the leadership that we have within it, the experience set, and then our ability now to tap into this next cycle which will be different than the last one. Rates will be well higher than that of financial repression." --- (MS, earning call, 2024/Q2)

"Your line is open, sir. John McDonald: Hi, good morning. Guys, I wanted to ask about your profitability targets and kind of how you're seeing the journey to the mid-teens ROTCE goal." --- (WFC, earning call, 2024/Q1)

Risk Management Strategies

Financial institutions employ diverse risk management strategies, including scenario analysis, liquidity risk management, continuous improvement through technology, and building robust risk and control infrastructures. These strategies help them navigate economic conditions, including interest rate changes, ensuring they meet cash flow requirements and maintain operational efficiency.

"The Risk Committee of the Board oversees firmwide financial and nonfinancial risks, which include climate risk, and, as part of its oversight, receives updates on our risk management approach to climate risk, including our approaches towards scenario analysis and integration into existing risk management processes." --- (GS, sec filing, 2024/Q1)

"Liquidity Risk Funding and Liquidity Risk Management Our primary liquidity risk management objective is to meet expected or unexpected cash flow and collateral requirements, including payments under long-term debt agreements, commitments to extend credit and customer deposit withdrawals, while continuing to support our businesses and customers under a range of economic conditions." --- (BAC, sec filing, 2024/Q1)

"Continuously improving risk management through tactical actions, cultural mindset and long term technology based solutions will remain at the heart of everything we do, not only in services, but also across the firm." --- (C, event transcript, 2024/06/18)

"We're focused on investing in growing the business. We're focused on spending what's necessary to build the right risk and control infrastructure and we're focused on driving efficiency out of the Company and that lever is as continues to be exactly what it's been." --- (WFC, earning call, 2024/Q2)

"firm. Across the investment bank, navigating changes in the cycle means being deliberate around risk management and, given geopolitical uncertainty, where we spend our time to deliver clients, solutions, and to capture share.In wealth management, we continue to focus on aggregating assets and delivering strong advice." --- (MS, earning call, 2024/Q2)

Impact on Consumer Behavior

Consumers are increasingly engaging in yield-seeking behaviors, shifting deposits to higher-yield accounts and moving cash as interest rates rise. This trend is evident across various financial institutions, with notable increases in consumer credit balances and default rates, indicating a significant impact of interest rate changes on consumer financial behavior.

"So we could start off talking about deposits and customer behavior. A lot of us went into the year expecting to see a slowdown in mix shift and yield seeking behavior across consumers and corporates." --- (PNC, Bernstein's 40th Annual Strategic Decisions Conference, 2024/05/29)

"Brian Moynihan: Yes, if you look on the consumer business and you think about tracking those deposit accounts from pre-pandemic to now, which is one thing we’ve talked about for different purposes, but if you look at where all the deposit balances, if people with lower average balances are still multiples of where they were pre-pandemic, people in the higher balances are actually lower because obviously they were sitting on cash in the pandemic and accumulated more cash, and when rates came up, they moved it." --- (BAC, earning call, 2024/Q1)

"You talked about the mix shift and non-interest down and interest bearing up, but just wondering just what's happening on the pricing side and are you still seeing both sides, consumer and wholesale, if you can maybe just kind of give us the dynamics that's happening underneath and how you expect that to continue as we get to this, as we stay in this rates peak?" --- (WFC, earning call, 2024/Q1)

"As expected, we've also observed an increase in yield seeking behaviors. We were able to retain 80% of yield seeking flows internally, up from 60% last year and generated net new money through our CDs and wealth management offerings." --- (JPM, event transcript, 2024/05/20)

"The question is, I'm seeing data that says the consumer credit balances are rising and the default rates are increasing." --- (BAC, event transcript, 2024/04/24)

Future Outlook and Predictions

Financial institutions anticipate stabilization in 2024 despite further rate cuts, with expectations of continued migration from non-interest-bearing to interest-bearing accounts impacting Net Interest Income (NII) outlooks.

"So less concerned about the full year '24 outlook. I was hoping you could just speak to the inputs or assumptions that, that's supporting that expectation around troughing or stabilization, given further rate cuts that are reflected in the forward curve beyond '24." --- (WFC, earning call, 2024/Q1)

"I mean how are we thinking about ongoing migration of non-interest-bearing into interest-bearing in the current environment, and how that affects our NII outlook and our expectation for weighted average rate paid on deposits. And the answer to that question is that we do continue to expect that migration to happen." --- (JPM, earning call, 2024/Q2)