Major US Banks Face Weakest Lending Income in Two Years Amid Changing Rate Environment

The US banking sector is set to report its lowest net interest income (NII) in nearly two years, with combined earnings from loans expected to be around $62 billion across the top four lenders—JPMorgan Chase, Bank of America (BofA), Citigroup, and Wells Fargo​. This decline, approximately 5% down from Q3 2023, is a consequence of several factors, notably the recent shift in the Federal Reserve’s monetary policy and increasing competition for deposits.

A Deteriorating Net Interest Margin (NIM)

Net interest income, the difference between what banks earn on loans and pay on deposits, initially soared during the Fed’s aggressive rate hikes in 2022. However, as rates stabilised and the banks adjusted their deposit offerings to match market conditions, profit margins have been squeezed. Moreover, the Fed’s recent rate cut, the first in over four years, further signals a headwind for net interest margins (NIM) going forward​.

This contraction has been most severe for banks like JPMorgan, which held a higher proportion of assets in short-duration securities that offered high returns during the rate hike period. These assets are now yielding significantly less, and the bank has already seen its NII forecasts for 2025 revised down from $91.5 billion to $89 billion​. Meanwhile, BofA, which invested a greater portion of its deposits into long-duration assets, may see some recovery as rates decline, reducing the unrealised losses on its fixed-income securities​.

Broader Industry Impact: CRE and Consumer Credit Concerns

Beyond the big four banks, the entire sector is facing a slowdown in loan demand. Commercial real estate (CRE) loans are emerging as a key area of vulnerability, with delinquencies rising and CRE-related charge-offs increasing​. The impact on smaller regional banks, which tend to have higher exposures to CRE, could be more pronounced. Data from S&P Global shows that office-related CRE loans, a historically resilient asset class, are now a significant contributor to criticised loans for many regional institutions​.

Consumer credit has also been a mixed bag. Credit card balances have risen, with the top ten US credit card lenders holding approximately $951 billion in outstanding balances as of Q3 2024. This is indicative of consumers relying more on credit amidst a higher cost-of-living environment. However, with rising charge-off rates and increased credit loss provisions, banks are taking a more conservative stance on expanding this portfolio​.

Investment Banking: A Glimmer of Hope?

In contrast to the NII struggles, investment banking is seeing a potential rebound. After two years of subdued activity, analysts forecast that investment banking fees across major banks will increase by at least 20% in Q3 2024. This surge is expected to be driven by a resurgence in equity and debt underwriting, alongside a more robust M&A pipeline​. Banks like Goldman Sachs and Morgan Stanley, which rely more on fee-based revenue than on traditional lending, are better positioned to benefit from this recovery.

MY ANALYSIS: Outlook

While the headline figures paint a challenging picture for traditional banking activities, the sector’s overall resilience hinges on its ability to adapt. In my opinion, banks will need to prioritise optimising their balance sheets and seek out alternative income sources. For instance, a shift towards wealth management, which tends to be less rate-sensitive, could offset some of the NII declines. Likewise, expanding into digital and fintech partnerships could provide new avenues for revenue growth, particularly in consumer finance, where neobanks have been rapidly gaining market share​.

Going forward, it will be crucial for banks to remain flexible in their strategies. The upcoming earnings season will likely set the tone for how banks navigate a lower-rate environment and renewed competitive pressures from non-traditional players. For investors, focusing on institutions with diversified income streams and prudent risk management could be the key to navigating the evolving landscape.

Conclusion

The Q3 2024 earnings will provide more than just a snapshot of the current state of US banking. They will serve as a barometer for how well-positioned these institutions are to face the new normal—one defined by tighter margins, lower loan demand, and rising credit risks. Despite the challenges, those banks that successfully pivot towards fee-generating activities and innovative partnerships will be the ones to watch.

In summary, while NII pressures remain, it is the strategic response of each bank that will ultimately determine their resilience in the coming quarters.