Treasury

Magic words

Making sense of the latest bank earnings requires three crucial words.
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CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.

Three words, seventeen letters. Say them, and you’ll understand a crucial metric in the latest batch of bank earnings.

The seventeen-letter phrase in question: Net interest income (NII), or the difference between what lenders charge on loans and what they pay for deposits.

Here’s why it mattered: Since March 2022, when the Federal Reserve started increasing interest rates, the Fed’s fight against inflation has been the cornerstone of any and every conversation about the state of the economy. And for good reason, since those rising rates have been keenly felt: Higher interest rates have caused borrowing costs to skyrocket. Now, borrowers are paying more interest on mortgages, credit cards, auto and student loans, and other debt.

But banks typically have a more positive reaction to higher interest rates—and that’s where net interest income comes in. Banks are often winners when interest rates rise, because they can charge higher interest rates to borrowers than they pay depositors.

With the latest round of earnings, we saw that play out, as net interest income steadily rose this quarter for many of the big banks. One of the standouts was JPMorgan Chase. Its NII leaped 44% to $21.9 billion. Even excluding its purchase of First Republic Bank in May, JPMorgan still would’ve posted a 38% increase in net interest income.

Bank of America also reported a solid improvement: Its net interest income rose 14% to $14.2 billion. And Wells Fargo’s net interest income increased 29% to $13.2 billion, while the company also upped its full-year net interest income guidance.

Regional banks haven’t always seen the same benefits, but some smaller banks posted impressive increases in net interest income this quarter. M&T Bank Corporation’s NII jumped 27% to $1.81 billion. At US Bancorp, it grew around 28%, and Citizens Financial Group’s net interest income went up 5.5%.

All of this made for a better than expected earnings season for banks, especially after last quarter’s tumult. But the thing about boom times is they typically come to an end. The Fed hiked interest rates again on Wednesday—but that could be the end of it for this cycle. Should the Fed phase out of its spree, we’ll need three new words to pay attention to.

News built for finance pros

CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.