What's going on?
A trio of US banks reported their fourth quarter earnings on Friday. It was, mostly, good news – although investors’ eyes are firmly focused on future quarters.
What does this mean?
JPMorgan, Bank of America and Wells Fargo all saw their stocks rise moderately after they reported their earnings. More client trading in stocks and bonds around the election, increased income due to higher interest rates (see below) and a continued focus on reducing internal expenses helped them post decent earnings.
Despite these results, the real news for investors has yet to come. Bank stocks are up more than 20% since the US election, partly on hopes that a Trump administration will peel back some laws that limit banks’ activities and on expectations that the new interest rate environment will substantially boost banks’ profits.
Why should I care?
For the stocks: Changes to interest rates are expected to improve banks’ profitability – globally. (tweet this)
Most banks have a pretty simple business model: pay you (the depositor) an interest rate for lending the bank money and charge customers (e.g. also you, if you have a mortgage) a higher interest rate for borrowing money from the bank; i.e. they earn a spread. As interest rates go up (especially for longer-term borrowings, like mortgages), banks can start making a bigger spread by increasing borrowing costs more quickly than the interest rate they pay depositors. Given the recent signs that interest rates are more likely to go up this year, investors have been buying banks’ stocks and pushing up their prices.
The bigger picture: Investments are beginning to reflect a world that may have changed considerably in recent months.
In the eight years since the financial crisis, investments have been influenced primarily by interest rates going down. Many investors now think that 2016 will mark a low-point for interest rates that could last for years, if not decades. If that’s true, it will have a big impact on things like bond prices, mortgage rates and certain companies’ profits (e.g. banks).