Why banks are disappointed in the Fed
The Fed’s decision Thursday not to raise interest rates is good news for borrowers who still want to take advantage of the historically low rates, but not for one group that may have been hoping for the hike: banks. They’ve been warning investors about a decline in third quarter revenue. Now, they can’t count on an immediate rate hike to improve results.
The logic might seem a bit counter-intuitive when you consider that raising rates can mean fewer people borrowing, as well the fact that while banks earn interest on loans, they also pay it to depositors.
When interest rates do rise, banks may not increase the rates the charge and pay equally, said Gerard Cassidy, who covers bank stocks for RBC Capital Markets.
“A rise in short-term interest rates would enable U.S. banks to reprice their loans to corporations and companies, due to the fact that they’re variable rate loans,” he said. But when it comes to deposits, “banks are traditionally very slow to raise those rates relative to how quickly they raise the rates for loans.”
He said banks aren’t really worried about irking customers, as their deposit levels are at very high levels right now.
“Banks have a lot of deposits,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “They have an abnormally large amount of deposits, even by historic standards.”
That’s another reason banks would like to see rates rise: They’re not earning much interest on those deposits.
Finally, there’s stock price. After the Fed announcement, investors sold off bank shares. Paulsen said they had been hoping a rate hike would boost banks’ profits.
“It’s a double whammy when you think about it,” he said. “Not only do they not get additional income flow of their deposit balances, but they also have their stocks take a hit at the same time.”
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