The nation's largest banks face a hit to their profits as the Federal Reserve slashes interest rates and bond yields continue sliding amid the coronavirus pandemic, which is putting the brakes on the economy as businesses and travel shut down.
Banks like Bank of America, JPMorgan Chase and others rely on interest from mortgages and other kinds of loans to make their profits, so when those rates fall sharply, so do their earnings. Yields on bonds like the 10-year Treasury note are used to set rates on mortgages, and those yields have been dropping, pushing mortgage rates to record lows.
Citi analyst Keith Horowitz expects the low rates to put pressure on the bank finances over the next few years. He estimates a 4% contraction in profits for Bank of America in 2020, followed by no growth next year. Other large banks face similar results.
Bank shares have taken a serious hit so far this year. Bank of America has plummeted 40% while JPMorgan plunged 35%.
The industry is also facing risks of defaults by borrowers as companies suddenly shut down operations because of the coronavirus pandemic.
"We have never witnessed the impact of a sudden and prolonged economic shutdown" that will impact commercial lending and consumers, Horowitz wrote in a note to investors.
Major banks have stopped buying back their own stock so they will have more funds available for lending. Bank of America, Citigroup, JPMorgan Chase and are suspending buybacks through the second quarter, according to The Financial Services Forum, which includes major banks as members.
"The COVID-19 pandemic is an unprecedented challenge for the world and the global economy and the largest U.S. banks have an unquestioned ability and commitment to supporting our customers, clients and the nation," The Financial Services Forum said in a statement.