(Bloomberg) - US banks scored a big break from regulators on new capital rules — only to ruin their own celebration with downbeat outlooks on lending.
Fears that a Goldilocks era of healthy borrowers and fattened loan margins is ending swept onto the market’s center stage Tuesday, as financial stocks tumbled. JPMorgan Chase & Co. dialed back expectations for next year’s net interest income, while major auto lender Ally Financial Inc. sounded a warning bell on consumer credit metrics.
It made for a jarring split screen, with the Federal Reserve dialing down proposals for how much capital banks will have to hold against certain assets — just as banks signaled that the performance of some assets is set to worsen. Their statements will likely stoke debates over whether the industry will experience a soft-landing as interest rates tick down, and whether proposed rules are tough enough for worst-case scenarios over the longer term.
“We’re clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that’s worsened,” Ally Chief Financial Officer Russ Hutchinson told an industry conference. “As that pool of struggling borrowers in those later-stage delinquency buckets has grown, it gives us pause.”
The 24-firm KBW Bank Index slid about 1.9% at 3 p.m. in New York. JPMorgan led those declines, falling about 5%. Investment bank Goldman Sachs Group Inc. and credit-card lender Capital One Financial Corp. both slipped more than 3%.
At JPMorgan, interest-rates trends were the theme, as President Daniel Pinto told analysts that they’re being too optimistic in projecting next year’s expenses and net interest income — the difference between what banks earn on their assets and what they pay on debts.
NII, as it’s known in the industry, surged to a record at the four largest lenders last year on the back of higher rates. But for months, JPMorgan leaders including Chief Executive Officer Jamie Dimon have been cautioning shareholders that the firm is “over-earning” amid tailwinds that wouldn’t last forever.
Now, they’re diminishing amid expectations for the Fed to lower rates in coming months, Pinto said, calling analysts’ current NII estimates “not very reasonable.”
Meanwhile, Fed Vice Chair for Supervision Michael Barr unveiled extensive changes to proposed bank-capital rules — slicing roughly in half the 19% capital hike that regulators had proposed in mid-2023 for the eight biggest US banks.
Those lenders, including JPMorgan, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. would now face a 9% increase in the capital they must hold as a cushion against financial shocks.
The new framework followed a fierce lobbying campaign by the industry, which argued that more onerous rules would hurt the economy and put US banks on weaker footing against international rivals and nonbank lenders.
Ensuring stability is a balancing act, Barr said in a speech Tuesday at the Brookings Institution, conceding that banks had made some valid points. Federal Reserve Governor Michelle Bowman also gave some backing to banks’ criticisms in a separate speech, outlining ways to improve stress testing.
“There are benefits and costs to increasing capital requirements,” Barr said. “The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.”
By Hannah Levitt, Katanga Johnson and Paige Smith
