How Will Lower Interest Rates Affect JP Morgan?

Between March 2022 and July 2023, the Fed enacted 11 interest rate hikes and so ended the loose monetary policy that the financial markets enjoyed prior to then.

Borrowing rates have climbed to the 5.25% to 5.50% range and the consequence was a rapid rise in distressed situations for a few banks.

While the Federal Reserve contemplates cutting rates, commercial activity might pick up and create some prospects for the top financial stocks, such as JP Morgan. Speaking of which, what is the future likely to hold for Jamie Dimon’s firm if rates do fall.

How Will Lower Interest Rates Affect JPMorgan?

The net result of lower interest rates is likely to be to positive due to lower funding costs however there is likely to be pressure on fee based services and a compression in net interest margin.

Net interest margin is a key metric for bank and measures the difference between the interest earned on loans and the interest paid on deposits.

A cut in interest rate by the Fed is likely to see JP Morgan’s net interest margin has the potential to decline by 10-20 basis points depending on the magnitude of the rate cut.

In spite of the headwind, loan demand is likely to increase because lower borrowing costs generally stimulates demand for loans, including mortgages, personal loans, and business loans as customers take advantage of cheaper credit. Historically, JPMorgan Chase (NYSE:JPM) has seen loan growth rise by 3% to 5% annually as a result.

Another positive for the firm is lower funding costs because, while the interest earned on loans might decrease, the interest JPMorgan pays on deposits and other borrowings also drops, which can partially offsetting the impact on net interest margin.

JP Morgan might see interest expenses fall by as much as 5-10%, reducing the total from $15 billion to $13.5-$14.25 billion annually.

Yet another positive for the firm can stem from investment portfolio appreciation because lower Interest rates can lead to existing bonds and other fixed-income securities gaining in value.

If we assume JPMorgan’s $600 billion securities portfolio appreciates by 1-2%, unrealized gains of $6-$12 billion may be on the horizon.

So too can lower interest rates lead to improved credit quality because they ease the financial burden on borrowers and reduce the likelihood of defaults. As a result, they improve the overall credit quality of JPMorgan’s loan portfolio and so non-performing loans might decrease from 0.80% to 0.70%, reflecting improved borrower conditions.

In spite of all the positives, JP Morgan may face pressure to enhance its fee-based services to maintain profitability in the areas of wealth management, investment banking, and advisory services.

Overall, the effect of lower interest rates is likely to be to stimulate consumer and business spending, leading to increased economic activity that benefits the bank’s broad array of financial services. Some estimates point to higher consumer spending that might lead to a 3-5% increase in transaction volumes and fee income in the bank’s retail banking segment, which had a revenue of $20 billion in 2023.

Finally, a tailwind of a lower interest rate environment is that capital markets activity is often boosted, including stock market valuations and trading volumes, benefiting JPMorgan’s trading and investment banking divisions.

How JP Morgan Has Navigated a Challenging Economic Climate

As of March 31, 2024, it had $4.1 trillion in assets and management reported impressive net incomes and year-over-year increases in the top line. In 2022, the yearly net income declined by 22% from the prior year and increased by 32% in 2023.

In the first quarter of fiscal 2024, JPMorgan’s net revenue was $42.5 billion, showing an increase of 8% (only 4% excluding First Republic). Its net income was $13.4 billion, rising by 6% (1% excluding First Republic).

Speaking of which, last May, JPMorgan acquired majority assets and assumed the deposits and certain other liabilities of First Republic Bank from the Federal Deposit Insurance Corporation. The acquired bank was headed toward insolvency before the deal.

Subsequent to the purchase, JPMorgan began converting First Republic’s locations into luxury branches, called JPMorgan Financial Centers.

So while the macro backdrop is somewhat “unsettling,” and inflationary pressures are still taking a toll, JP Morgan has navigate the current environment well, just as it did during the Great Recession.

Wells Fargo

With an illustrious history spanning more than 150 years, Wells Fargo (NYSE:WFC) has become a stalwart in the financial services industry. As of the quarter ended March 31, 2024, Wells Fargo had $1.92 trillion in assets.

Higher interest rates have affected the company’s operations. For the first quarter of fiscal 2024, Wells Fargo’s net interest income decreased by 8% compared to the same quarter last year, reflecting the impact of customers migrating to higher-yielding deposit products and lower loan balances. For the same quarter, its return on assets climbed up by 0.25 percentage points sequentially to 0.97%.

Despite its revenue fall, Wells Fargo is seeing some traction in the credit card and personal lending sectors. Loans in the commercial banking sector were more or less flat compared to the same quarter last year. But provision for credit losses increased significantly in the same period.

Wells Fargo has a strong capital position, and it repurchased $6.1 billion of common stock. While the bank sees a lot of traction from strong card spending, an interest rate cut will likely elevate consumer spending. 

The stock’s price sits at 11.76x its forward non-GAAP earnings, which is a little bit higher than the current industry average. Still, it is lower than its own five-year average of 18.14x. Wall Street analysts see a 6.7% upside in the stock.

Goldman Sachs 

Leading global investment banking company Goldman Sachs (NYSE:GS) also provides diversified financial services. At the same time, it is as pure-play as an investment bank gets. The firm, founded in 1869, enjoys a vast global reach.

Despite sky-high interest rates, in the last reported quarter, Goldman Sachs faced a favorable investment environment. This might be the impact of the recovery in the stock market, as can be reflected in the resurgence in the initial public offering market. The first quarter saw seven larger IPOs raise over $500 million each.

In the first quarter, Goldman Sachs reported net revenues of $14.21 billion, representing a 16% increase year over year and 26% sequentially. This impact was felt across all its major segments. Its assets under supervision rose by $36 billion during the quarter to reach a record $2.85 trillion.

Its earnings per common share reached $11.58, which reflects a large increase compared to the prior quarter. A tailwind from investment banking fees was also observed, which climbed to $2.08 billion, reflecting a 32% increase compared to the first quarter of 2023. The company continues to leverage its core strength, which might be harnessed if the rate cuts help investment activity pick up pace.

The stock’s price sits at 12.79x its forward non-GAAP earnings, which is a bit stretched. Still, considering growth, its forward non-GAAP PEG is 0.64x. Wall Street analysts expect the stock’s price to contract a little bit.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.