Here’s Why Bank Investors Are Worried About the Fed

February 24, 2016, 3:36 PM UTC
Traders At The NYSE As U.S. Stocks Rally to Halt Five-Day Loss
Trading information about JPMorgan Chase & Co. is displayed on a monitor at the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Feb. 12, 2016. U.S. stocks halted a five-day slide that dragged global equities into a bear market, as oil rebounded from a 12-year low and bank shares surged. Photographer: Michael Nagle/Bloomberg via Getty Images
Photograph by Bloomberg via Getty Images

Late last year, many investment strategists predicted bank stocks would be the big winners when the Federal Reserve raised interest rates.

That prediction turned out to be about as wrong as Wall Street gets. Instead, banks have been one of the worst-performing sectors in the stock market this year. And it looks like a lot of it has to do with interest rates.

There’s growing concern that, because of the recent weakness in the market and the economy, the Fed could leave interest rates where they are, or worse, for banks at least, go back to cutting rates. At J.P. Morgan’s annual investor day on Tuesday, CFO Marianne Lake laid out how much the bank could lose in additional earnings if the Fed deviates from its current predicted path of increasing interest rates. It’s big. Far bigger than the bank currently thinks it could lose from bad loans to oil and gas companies, another worry that the bank highlighted at its investor day.

According to the bank’s estimates, J.P. Morgan (JPM) stands to make roughly $13.5 billion less if interest rates stay where they are today for the next two years. Worse, Lake said that if interest rates were to drop 1 percentage point, that would cut J.P. Morgan’s earnings by $3 billion a year. A drop of 1 point would put the Fed’s short-term interest rates at negative 0.75%, which seemed unlikely a few months ago, though more people are talking about it now.

Of course, interest rates are likely to rise. J.P. Morgan CEO Jamie Dimon on Tuesday reiterated his belief that the U.S. economy was sound and would continue to grow even if China and other markets slowed. “My personal belief is that we will get through this and the U.S. economy will continue to grow,” says Dimon.

But even if the Fed’s short-term interest rates only rise to 1% by the end of 2018, instead of 3% as the average prediction of the Fed governors suggests, J.P. Morgan would stand to make roughly $10 billion less. Bank investors have good reason to be wary these days.

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