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Revenues from Wall Street: Net interest income from low interest rates



  • Several of Wall Street's largest banks announced results of the second quarter this week that shook the investors and worried about the impact of lower interest rates.
  • On Sundays that led to bank earnings, investors and analysts were worried about net interest margins, one of the most important indicators of banks' profitability.
  • Both "Wells Fargo" and "Citigroup" reported reduced net interest margins, and Goldman Sachs cut its annual outlook for net interest income.
  • The Fed is expected to adjust borrowing costs in July, and with the rate cuts, banks earn less money on their overnight deposits to other institutions.
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It is expected that the Fed's expected rate in July will already emerge across Wall Street.

All major banks in the United States reported that earnings in the second quarter of this week, with several announcements, were reduced to net interest margins due to interest rates that had already fallen in anticipation of the Fed's action. Lower rates are bad for banks, because they earn less interest income on overnight deposits of other lending institutions.

Investors worry that net interest margins are already in place, as the Bank is preparing to start cutting rates in July. During a speech in late June, Federal Reserve Chairman Jerome Powell told the Foreign Relations Council that it is better to adjust borrowing costs earlier and later if there are signs of weakness in the economy.

New York Fed Chairman John Williams and Richard Clerida, vice president of the Federal Reserve, reiterated similar feelings this past week, adding that it is important for central banks to act swiftly and be proactive in reducing rates.

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The big banks across Wall Street already feel the pressure, and it could continue if the Federal Reserve is again down.

The following banks reported either a decline in net interest margins or reduced their guidelines for the year:

  • Citi: Net interest margins fell 2.67% from 2.70% a year ago
  • JPMorgan: Reduced net income from interest income to $ 57.5 billion from more than $ 58 billion predicted in the first quarter
  • Wells Fargo: Net interest margins declined to 2.82% from 2.93% last year

While Citi's net interest margins declined, net interest income still increased by 2%, thanks to the strengthening of lending. Morgan Stanley does not report on net interest margins, but Jonathan Prussen, chief financial officer of the bank, said lower interest rates would damage the wealth management margins, but the impact on stock and fixed income was difficult to predict.

"The bigger issue that occurred in the revenue season was whether the NIM's planning would have caused tangible downward revisions in the EPS estimates," said Sal Martinez, an UBS analyst Wednesday. "So far, they have not led us to change the EPC estimates very much."

Wall Street also largely reported a decline in stocks and fixed income trading. Morgan Stanley said earnings from trading stocks declined by 14%, or more than any other major bank.

Goldman Sachs, which has not hit much at the rate changes, since there are fewer deposits on its books, announced an increase in fixed income trading, but a decline in stocks. The company also announced revenue from investments and loans of 2.53 billion dollars, the highest level in eight years.

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