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High interest rates set to pressure small players

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1 year ago

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 7, 2024.

Brendan Mcdermid | Reuters

The benefits of scale will never be more obvious than when banks begin reporting quarterly results on Friday.

Ever since the chaos of last year’s regional banking crisis that consumed three institutions, larger banks have mostly fared better than smaller ones. That trend is set to continue, especially as expectations for the magnitude of Federal Reserve interest rates cuts have fallen sharply since the start of the year.

The evolving picture on interest rates — dubbed “higher for longer” as expectations for rate cuts this year shift from six reductions to perhaps three – will boost revenue for big banks while squeezing many smaller ones, adding to concerns for the group, according to analysts and investors.

JPMorgan Chase, the nation’s largest lender, kicks off earnings for the industry on Friday, followed by Bank of America and Goldman Sachs next week. On Monday, M&T Bank posts results, one of the first regional lenders to report this period.

The focus for all of them will be how the shifting view on interest rates will impact funding costs and holdings of commercial real estate loans.

“There’s a handful of banks that have done a very good job managing the rate cycle, and there’s been a lot of banks that have mismanaged it,” said Christopher McGratty, head of U.S. bank research at KBW.

Pricing pressure

Take, for instance, Valley Bank, a regional lender based in Wayne, New Jersey. Guidance the bank gave in January included expectations for seven rate cuts this year, which would’ve allowed it to pay lower rates to depositors.

Instead, the bank might be forced to slash its outlook for net interest income as cuts don’t materialize, according to Morgan Stanley analyst Manan Gosalia, who has the equivalent of a sell rating on the firm.

Net interest income is the money generated by a bank’s loans and securities, minus what it pays for deposits.

Smaller banks have been forced to pay up for deposits more so than larger ones, which are perceived to be safer, in the aftermath of the Silicon Valley Bank failure last year. Rate cuts would’ve provided some relief for smaller banks, while also helping commercial real estate borrowers and their lenders.

Valley Bank faces “more deposit pricing pressure than peers if rates stay higher for longer” and has more commercial real estate exposure than other regionals, Gosalia said in an April 4 note.

Meanwhile, for large banks like JPMorgan, higher rates generally mean they can exploit their funding advantages for longer. They enjoy the benefits of reaping higher interest for things like credit card loans and investments made during a time of elevated rates, while generally paying low rates for deposits.

JPMorgan could raise its 2024 guidance for net interest income by an estimated $2 billion to $3 billion, to $93 billion, according to UBS analyst Erika Najarian.

Large U.S. banks also tend to have more diverse revenue streams than smaller ones from areas like wealth management and investment banking. Both should provide boosts to first-quarter results, thanks to buoyant markets and a rebound in Wall Street activity.

CRE exposure

Furthermore, big banks tend to have much lower exposure to commercial real estate compared with smaller players, and have generally higher levels of provisions for loan losses, thanks to tougher regulations on the group.

That difference could prove critical this earnings season.

Concerns over commercial real estate, especially office buildings and multifamily dwellings, have dogged smaller banks since New York Community Bank stunned investors in January with its disclosures of drastically larger loan provisions and broader operational challenges. The bank needed a $1 billion-plus lifeline last month to help steady the firm.

NYCB will likely have to cut its net interest income guidance because of shrinking deposits and margins, according to JPMorgan analyst Steven Alexopoulos.

There is a record $929 billion in commercial real estate loans coming due this year, and roughly one-third of the loans are for more money than the underlying property values, according to advisory firm Newmark.

“I don’t think we’re out of the woods in terms of commercial real estate rearing its ugly head for bank earnings, especially if rates stay higher for longer,” said Matt Stucky, chief portfolio manager for equities at Northwestern Mutual.

“If there’s even a whiff of problems around the credit experience with your commercial lending operation, as was the case with NYCB, you’ve seen how quickly that can get away from you,” he said.

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Chinese stocks that could survive delisting, tariff worries

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Investor protection during market volatility through tactical fund

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April 19, 2025

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A different 'tack' for rough markets: How one ETF keeps moving to mitigate stock losses

Katie Stockton thinks she has a viable option for investors trying to withstand wild market swings.

She manages the Fairlead Tactical Sector ETF (TACK), which is designed to be nimble in times of market stress. It’s not tied to an index.

“What we try to do is help investors leverage the upside through sector rotation, but also minimize drawdowns,” the Fairlead Strategies founder told CNBC’s “ETF Edge” this week. “That’s obviously a big advantage longer term when you can just go into a less deep hole to climb out of.”

According to Stockton, her ETF is particularly nimble in this environment because it uses multiple strategies — not just one. Since President Donald Trump announced his “reciprocal” tariffs on April 2, the ETF has fallen just over 4%, while the S&P 500 has lost 6.9%.

Stockton’s ETF rotates monthly between all 11 S&P 500 sectors.

“We don’t own technology anymore,” Stockton said. “Some of the sectors that we like to invest in have fallen out of favor.”

As of April 16, the fund’s top sector holdings included consumer staples, utilities and real estate, according to Fairlead Strategies. 

As of Thursday’s close, the Fairlead Tactical Sector ETF is down 4% so far this year.

Meanwhile, ETFs that are centered around specific sectors or strategies are largely under pressure. For example, the Invesco Top QQQ Trust (QBIG), which tracks the top 45% of companies in the Nasdaq-100 index, is down 22% in 2025.

The GraniteShares YieldBoost TSLA ETF (TSYY) is off 48% since the beginning of the year.

BTIG’s Troy Donohue, the firm’s head of Americas portfolio trading, thinks Stockton’s ETF employs a sound strategy – particularly during the recent “dramatic pullback.”

“TACK is a great example of how you can be nimble during these market times,” Donohue said. “It’s great to see it in an ETF product that has performed really well during this recent drawdown.”

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Capital One and Discover merger approved by Federal Reserve

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2 days ago

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April 18, 2025

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Sign at the entrance to a Capital One bank branch in Manhattan.

Erik Mcgregor | Lightrocket | Getty Images

Capital One Financial‘s application to acquire Discover Financial Services in a $35.3 billion all-stock deal has officially been approved by the Federal Reserve and the Office of the Comptroller of the Currency, the regulators announced on Friday.

“The Board evaluated the application under the statutory factors it is required to consider, including the financial and managerial resources of the companies, the convenience and needs of the communities to be served by the combined organization, and the competitive and financial stability impacts of the proposal,” the Fed said in a release.

Capital One first announced it had entered into a definitive agreement to acquire Discover in February 2024. It will also indirectly acquire Discover Bank through the transaction.

Under the agreement, Discover shareholders will receive 1.0192 Capital One shares for each Discover share or about a 26% premium from Discover’s closing price of $110.49 at the time, Capital One said in a release.

Capital One and Discover are among the largest credit card issuers in the U.S., and the merger will expand Capital One’s deposit base and its credit card offerings. 

After the deal closes, Capital One shareholders will hold 60% of the combined company, while Discover shareholders own 40%, according to the February 2024 release.

In a joint statement, Capital One and Discover said they expect to close the deal on May 18.

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Jamie Dimon on Capital One’s $35.3 billion Discover acquisition: ‘Let them compete’

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