Bank bosses aren't worried about lower interest rates — and even see some upside

• Wall Street's biggest banks face a less profitable lending environment as interest rates fall.
• Bank bosses shrugged off those concerns this week and pointed to several benefits of lower rates.
• They cited stronger demand for loans including mortgages and refinancing, and improved repayment.

Lending threatens to become far less lucrative for Wall Street's biggest banks as interest rates fall. But executives don't seem to be worried — and even spy some benefits from cheaper borrowing.

The Federal Reserve cut its benchmark rate by 50 basis points to between 4.75% and 5% in late September. The central bank had hiked that rate from nearly zero to as high as 5.25% between March 2022 and July 2023 in response to soaring inflation.

The Fed is widely expected to keep lowering rates to stimulate economic growth and stave off a recession — while being careful not to rekindle inflation or overheat the job market.

Bank of America CFO Alistair Borthwick said on an earnings call this week that even if rates drop below 3%, lenders have historically done well in that environment. He emphasized that banks have many levers to pull that can fuel strong performance.

"We control our client experience," he said, according to an Alphasense transcript. "We control the level of service. We control the relationship orientation, we control the pricing. We control our expense. So, there are an awful lot of things that we control through any cycle."

Banks also offer a wide range of services, some of which do better when rates fall, even as others fare worse.

Citigroup CEO Jane Fraser told analysts this week that fee-based revenues at her bank rose by double digits last quarter despite rates declining, "reflecting the growing diversity of our earnings mix."

Lower payment rates fueled interest-earning balances last quarter, and the bank grew its retail mortgage portfolio and overall loan book, Fraser said.

Consumer revival

Falling rates promise to reduce interest payments on mortgages, car loans, credit cards, and other debts. But that could leave consumers with more disposable income, which could benefit banks.

Citigroup CFO Mark Mason said on the bank's earnings call that inflation cooling and rates dropping helps consumers and the overall economy, which can reduce loan delinquencies and net credit losses for banks as more people can repay their debts. He said the lender is already seeing more stability with delinquencies improving.

Wells Fargo CEO Charles Scharf said on his bank's earnings call that waning inflation and sliding rates should be especially helpful to lower-income people. However, he reported weaker demand for commercial loans because of economic uncertainty and customers holding off on borrowing until rates fall.

Wells Fargo has reduced rates on some deposits and raised them on others, striking a balance between protecting its profits and losing customers.

Morgan Stanley CFO Sharon Leshaya told analysts this week that her bank's net interest income would likely decrease year-over-year this quarter. Similar to Citi's Fraser, she highlighted loan growth last quarter, saying "this is just the beginning." She also reported a steady increase in mortgages, and forecasted declining rates would fuel a jump in refinancing activity.

On JPMorgan's latest earnings call, CFO Jeremy Barnum reported a "pick up in mortgage applications and a tiny bit of pick up in refi," as well as "some hints of more activity" in the banking giant's multifamily lending business.

Barnum said the lender was yet to see a material acceleration in loan growth or a surge in investment banking deals. But he said the Fed's jumbo rate cut might have sparked more activity in debt capital markets recently.

Stock surge

Goldman Sachs was the exception to the rule this quarter, with little discussion from executives on its earnings call about how falling interest rates are affecting the bank.

CEO David Solomon said the Fed's first rate cut has raised hopes of avoiding a US recession, which could translate into more economic activity. He added that Goldman's clients were "highly focused on the trajectory of rates" around the world, among other issues.

Bank stocks have fared well since the Fed cut, with Citi and BoA both up just over 8% in the past month, Goldman rising 9%, Wells Fargo jumping 17% and Morgan Stanley soaring almost 20%.