Three to four hikes
The Federal Reserve is aggressively following its hawkish policy stance, with three to four rate hikes targeted in 2018 to bring the federal fund rate to 2.25%–2.50% from lows of 0.25% in December 2015. Bond markets have seen steep withdrawals amid expectations of continued hawkish policy in 2019. Equity markets are adjusting to a higher cost of capital, affected by a higher cost of debt.
A steep interest rate curve has helped banks (XLF) command higher spreads. However, it has impacted growth in fresh credit offtake in recent quarters. A steeper curve could result in lower profitability for leveraged companies, partially offset by benefits from lower taxes. Credit offtake could take a hit unless new businesses don’t come forward for borrowing.
The Trump administration has also amended the Dodd-Frank Act to improve lending at mid- and small-size businesses as well as retail lending. This move should mean more competition for major lenders like Wells Fargo (WFC) and JPMorgan Chase (JPM) with major shares of revenues from the United States. Bank of America (BAC) and Citigroup (C) could benefit from their globally diversified revenues.
Wells Fargo (WFC) managed a net interest margin or NIM of 2.8%, reflecting an upward trend over the past couple of years. Margins could rise further in 1Q18 to ~3.0%. The bank has managed net interest income of $12.3 billion, versus $12.4 billion in the prior year, marginally affected by lower lending or originations. Net income rose to $6.2 billion from $5.2 billion, helped by amendments to tax rates.