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How Rate Hikes and Tax Rate Cuts Could Play Out for Bankers

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Dec. 4 2020, Updated 10:52 a.m. ET

Rate hikes

The Federal Reserve is targeting a minimum of three rate hikes, preferably of 25 basis points, in 2018. Goldman Sachs (GS) anticipates the possibility of four rate hikes given the recovery of the economy and its fundamentals.

The Fed is targeting one last rate hike in December 2017 to bring the federal funds rate from 1.25% to 1.50%. The targeted rate by the end of 2018 would be around 2.25%–2.50%, compared to a peak of 5.25% toward the end of 2006.

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Rate hike scenario impacting credit

The rate hikes since December 2015 have been a boost to bond markets, net interest income, and margins for commercial banks (XLF). For Wells Fargo (WFC), the interest rate hike have been the only driver for stable performance as the bank operates on strict underwriting guidelines, resulting in lower offtake.

However, JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) have seen improved margins and contribution from other drivers.

Global presence a key

The rate hikes have already impacted mortgage activity and lower credit offtake, resulting in stable to marginal growth in net interest income for major banks. The Trump administration is pushing for tax rate cuts, which could generate additional liquidity for the corporates. As a result, credit offtake can face further pressure in the medium to long term.

Banks would have to either seek lower-quality credit or more penetration into retail and global banking in a bid to expand their loan books. Citigroup (C) has a strong presence in Europe and Asia, and it could benefit from their regionally diversified revenues.

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