Big US banks lose patience with Fed

Janet Yellen’s decision to delay an interest rate rise has worsened the outlook for big US banks, prompting them to try to eke out profits by shifting excess cash into longer-term assets.

In the years since the crisis the banks have grown used to grappling with higher costs and subdued demand for credit, while keeping plenty of cash and cash-like instruments on hand in the hope of benefiting from an uptick in short-term rates..

But, after the decision from the US Federal Reserve to keep its target overnight rate on hold this month, more lenders are taking their cue from Wells Fargo, the biggest bank in the world by market capitalisation, said analysts.

Over the past year the San Francisco-based bank has run down its cash and short-term investments to buy longer-term assets, on the basis that rate will stay “lower for longer”, according to John Shrewsberry, chief financial officer.

That conviction is now catching, said Jason Goldberg, an analyst at Barclays, which recently hosted representatives from about 150 banks at a conference in New York.

“The consensus was: give up on the Fed,” said Goldberg.

Aggregate net profits for the big four universal banks in the quarter ending in September, to be reported in the middle of next month, are set to be about 2 per cent lower than the previous year, according to consensus forecasts.

While loan growth has been solid, rising at about 4 or 5 per cent, capital markets units are not firing on all cylinders. Executives from Bank of America, Citigroup and JPMorgan have indicated that they will probably report about a 5 per cent drop in third-quarter revenues from trading. Fees from mergers and underwriting should be between 5 and 10 per cent lower, Deutsche Bank believes.

In the second quarter, noted Barclays, about half of banks under its coverage reduced their sensitivity to rate rises by converting cash to higher-yielding assets — the highest proportion for more than four years.

Wells Fargo added $50bn of securities to its held-to-maturity investment portfolio over the year to June, according to public filings, with much of it going to Treasuries and bonds issued by Fannie Mae and Freddie Mac, the government-backed mortgage companies. “We’re earning today rather than maintaining all of that sensitivity for the future,” said Shrewsberry, during the bank’s second-quarter results presentation.

Even if the Fed does push up short-term rates for the first time in nine years in the months ahead, the prospect of further easing measures in deflation-hit Japan and the still sluggish eurozone is likely to mean that the pace of increases remains slow.

That means that banks will be under pressure to find more ways to boost profits, such as accelerating branch closure programs.