Keffe, Bruyette, & Woods comments on "The Credit/Rate Challenge for Banks"

Keefe, Bruyette & Woods this week weighed in on the financial industry saying that credit costs are expected to increase. This comes a week after, “noise of big bank earnings” and an overall increase in net interest margins for the major players of the industry. Analysts at Keffe, Bruyette & Woods write, “at the end of the third quarter the U.S. banking system was under-earning on net interest income and overearning on credit costs…. expectations were that higher interest rates would allow the net interest margin to recapture that shortfall prior to credit costs increasing. Since the beginning of the year, those expectations have been reversed—expectations for rate hikes have been pushed out and the fall in oil prices and rising credit spreads have increased expectations for higher credit costs.” As the costs of credit go up money becomes more expensive which could lead to less borrowing and thus less investments in the economy. This will pose a major challenge for banks such as Bank of America BAC, JP Morgan JPM, and Wells Fargo WFC who rely earning income from lending out their money. In the short term Keffe, Bruyette, and Woods say that, “earnings estimate revisions for banks have been negative and we expect that trend to continue.” Before trading on Tuesday Bank of America is priced at $15.38, JP Morgan is priced at $55.93, and Wells Fargo is priced at $51.64.