Is Wells Fargo Seeing Benefits from Interest Rates Yet?
Interest rates outlook
The US Federal Reserve has raised the interest rate on federal funds four times since 4Q15, bringing the current rate to 1.25% in June 2017. These rising rates have helped commercial banks (XLF) improve their margins on earning assets, though these have been partially offset by the marginal rise in the cost of liabilities.
The Fed is now expected to raise the rate one more time in 4Q17, but rate hikes in 2018 will depend on how other global central banks, especially the European Central Bank, contend with their current near-zero rate policies.
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Commercial banks and insurance companies have been operating with lower margins and investment incomes amid a low-interest rate environment, but this trend is changing as rates move higher. As rates rise at a quicker pace, credit offtake is expected to slow down for banks and institutions.
Credit offtake for commercial banks has been holding up performances as trading activity has declined in recent months. But if offtakes slow down, banks could see declining revenues on both fronts, and this would only partially be offset by higher net interest margins.
Wells Fargo (WFC) has managed a high NIM (net interest margin) of 2.7%–2.9%. However, the bank has seen slow credit offtake due to its higher exposure to mortgages and real estate. Banking peers JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) have all seen strong growth in net interest income, helped by rates and offtake. But amid declining trading activity, banks face the pressure of expanding their loan books and other offerings.