An article in today’s Wall Street Journal (subscription link) explains part of the reason why this will be a disappointing earnings season for the banking industry:
For almost a year, the flat Treasury yield curve loomed on the horizon.
Bankers could see it coming. They had time to plan, knowing that the narrowing spread between short- and long-term interest rates squeezes their profits.
But the flattening yield curve has stymied even some of the most sophisticated and well-equipped banks in the U.S. [...]
The difference between the shorter- and longer-term rates affects not only a bank’s core business of collecting deposits with a relatively low rate paid to customers and lending out that money at a higher rate. The net profit that banks, especially the bigger ones, can make from their credit-card operations and their currency, securities and other financial trading also is affected.
Banks unable to raise all the money they need to lend or conduct trades must borrow money on a short-term basis. They attempt to make more money by lending it out at a higher rate or investing it in better-yielding longer-term securities. But with the long-term and short-term interest rates about the same, that is a much less-profitable exercise.
If this is a longer-term phenomenon, expect banks to seek other revenue sources to make up the shortfall. For example, I know that at least one of the largest banks in the world is rather fond of fee income. I wouldn’t be at all surprised to see bumps in the fees they already charge, a few new fees, and maybe a stricter tuning of the models they use to decide what interest rates to charge credit card holders.