Rising Interest Rates Worry Banking Industry

Transcript

DAVID GREENE, HOST:

And U.S. banks certainly have their eyes on the Fed. As interest rates go up, that means a riskier environment for the banking industry. For now, the industry is on a roll. Today, Bank of America said second quarter profits jumped 63 percent over last year. Another big bank, Goldman Sachs, yesterday said its profits for the recent quarter were double that of the same time last year.

Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: On the surface, at least, these are pretty good times for the nation's banks. JP Morgan Chase told investors last week that it made 31 percent more money during the second quarter of 2013 than it did in the same period the year before. Wells Fargo, Citicorp and Goldman Sachs have all come out with second quarter earnings and each said it earned more money than it expected - words that Wall Street loves to hear.

NANCY BUSH: The results we've seen thus far have been surprisingly good.

ZARROLI: Bank analyst Nancy Bush says the bottom line in the nation's banking sector is still strong. That's partly because the housing market has been faring well, and partly because the banks are making a lot of money off trading. They buy and sell securities for themselves and their clients.

BUSH: The American banks are pretty flexible and they have since the financial crisis tended to weather times of volatility pretty well.

ZARROLI: But Bush says there's another big reason why banks did so well last quarter. As the financial crisis recedes into the distance, there are fewer outstanding bad loans. Foreclosures are down. When their loan portfolios improve, banks don't have to keep as much money on reserve. And as they free up money from their reserves, their profits rise.

But this isn't the kind of profit growth the banks really want to see. Bank analyst Anthony Polini of Raymond James says what banks want to see is faster economic growth, and that's not happening.

ANTHONY POLINI: We really haven't seen that surge. Businesses in the U.S. appear to be healthy but still cautious about expansion and about the longer term economic outlook.

ZARROLI: Even as he was reporting stronger than expected profits last quarter, JPMorgan Chase CEO Jamie Dimon told investors there's still a lot of caution among consumers, small businesses and corporations. And now the banks have another problem to contend with. Interest rates have been climbing ever since Fed Chairman Ben Bernanke suggested that the Fed was ready to think about slowing its stimulus efforts. And with interest rates rising, the mortgage business is bound to suffer. Again, Nancy Bush.

BUSH: When you have that kind of a rate move that quickly and, you know, consumers had come to expect a three and a half percent, 30 year mortgage and suddenly its four something, there is an affordability impact.

ZARROLI: Already banks are beginning to ratchet down their expectations for the housing market. JPMorgan Chase said it expects its mortgage applications to fall by 30 to 40 percent during the second quarter of the year.

As interest rates rise, the value of the bonds that many banks trade can also fall, further eroding their profits. And banks face another challenge. U.S. regulators recently announced they are considering new limits on the use of leveraged money by banks. Leverage is a risky way of using borrowed capital to increase the return on an investment. And it is widely seen as one of the key causes of the financial crisis. But restricting it could also cut into the trading profits that banks make and banks say that threatens their bottom line.

Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.