How falling interest rates impact the US financial sector | Charts that Count
The FT's US finance editor Robert Armstrong looks at the way low interest rates have hit four different companies since the financial crisis - Visa, JPMorgan, Comerica and E-Trade
Produced filmed and edited by Gregory Bobillot. Additional camera by Donell Newkirk
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Today I'm going to talk about the impact of falling interest rates on the financial part of the US economy.
If you can remember as far back as 2018, in the middle of that year there was resurgent optimism both about the US economy and the idea that perhaps after a multi-decade decline in bond yields, interest rates were finally going to rise. But at the end of that year all of that optimism came to an end. Danger signals from the world economy and world markets caused a decline in the 10-year yield, and with it the economic prospects of companies in the financial sector took a nosedive.
So here in November 2018 is when the 10-year yield, after several months of rising began to fall again, and predictably financial stocks, four of which are represented here, started to fall. Since then, however, as bond yields have continued to fall and have settled at very low levels, different companies in the finance area have responded in very different ways.
Now the basic reason you might worry, if you are in the business of holding, moving, or lending money, lower rates means lower revenue and lower profit. Not all companies suffer, however. Visa stands to profit simply when money moves. It's not exposed to the price of money. And after an initial decline, when anxieties about the economy were at their highest, the company has continued its long bull run.
So where do you want to be in financials when rates are falling? You want to be in a company that's not exposed and just profits from the ever-increasing velocity of money through our economy. You don't necessarily want to be an investor in a bank.
The red line represents JPMorgan, which is the biggest and most diverse of the US banks. Yes, JPMorgan is exposed to falling interest rates. It's core business is still lending, but they have investment banking, credit cards, mortgage lending, all of these businesses which give their portfolio greater diversity. They have big advantages of scale, and despite lower rates JPMorgan's stock has held up pretty well. And if you looked at shares of the other large US banks, you would see a similar pattern.
Small US banks have not been so lucky. Comerica is a much smaller bank, very exposed to core business lending, which is the most interest sensitive of all banks businesses. And it has simply been hammered by declining interest rates. Banks like this, so-called asset sensitive banks, depend on interest rates for their core business and have been hammered by the stock market. And there is an open question about how well smaller rate sensitive banks can compete with the giant diversified banks such as JPMorgan.
The blue line may be the most interesting. Why would an online broker stock behave like a bank? Because E-Trade makes its money by collecting interest on the deposits of the people who trade on its broking platform. E-trade stock behaves just like Comerica stock up until early October.
Here, when the company got some bad news, not from the right markets but from one of its competitors, Charles Schwab, who cut trading commissions to 0, forcing E-Trade to do the same. So suddenly, not only was E-Trade suffering from the impact of lower interest rates, but its competitive situation was getting markedly worse. So its non-interest revenue was going to decline.
So what this chart as a whole shows is that while the financial sector is rate dependent, how different parts of the financial economy respond can be very different. These stock prices are a good proxy for that diversity. Companies all across the financial sector are under acute pressure from falling and low interest rates. But what the experience of E-Trade shows us is that interest rates are not the only source of pressure that's out there.
Whether you are a pure payments company like Visa, an asset sensitive bank like Comerica, a big diversified bank like JPMorgan, or an online brokerage like E-Trade, you also depend on fee income. And fee income in an environment where the economy is under pressure and competition is intense is also in danger.